Report No. 67
35.1. Article 22-Introductory.-
Article 22 levies a duty, under the head of "composition-deed", on four kinds of instruments by which a debtor arrives at some agreement with his creditors for the discharging of his debts, namely:-
(1) an instrument whereby a debtor conveys his property for the benefit of his creditors.1 This is often referred to as an assignment.2-3 It covers what is known in England as a clausio bonorum,4 but, in England, it is expected that it should require the creditors to accept less than the full amount;
(2) an instrument whereby payment of a composition or dividend on their debts is secured to the creditors5;
(3) an instrument whereby a debtor is allowed to continue his business, under the supervision of inspectors, for the benefit of his creditors;
(4) an instrument whereby a debtor is allowed to continue his business, under letters of licence6, for the benefit of his creditors.
The duty is ten rupees in each case.
1. Subbaraya v. Vythilinga, 1893 ILR 16 Mad 85 (89).
2. Chandrashankar v. Bai Magan, 1914 ILR 38 Bom 576: AIR 1914 Bom 55
3. Compare section 1(2)(a), Deeds of Arrangement Act, 1914.
4. Reg. v. Cooban, (1886) 18 QBD 269, referred to in ILR 38 Bom 576.
5. Chandrashankar v. Bai Magan, 1914 ILR 38 Bom 576 (590).
6. See below, point relating to Article 38.
35.2. Operation independent of bankruptcy law.-
Ordinarily,- the article operates before adjudication. Independently of bankruptcy law, an insolvent debtor, that is, a debtor who is not able to pay his debts in full or as they become due and payable, can enter into a valid arrangement with his creditors by which, without paying his debts in full, he obtains a release from the claims of the arranging creditors. These arrangements usually take the form either of a composition with creditors, or of an assignment of the arranging debtor's property to a trustee for their benefit.1 The England, there exists legislation prescribing certain formalities for such deeds of arrangement.2 There is no such restriction in India.
1. See Halsbury, 3rd Edn., Vol. 22, pp. 388-89.
2. See infra.
35.3. A debtor who is unable to pay his debts in full may arrange his affairs with his creditors without having recourse to a petition for his own adjudication.1 Arrangements between debtors and creditors are known as composition agreements. A composition agreement may take the form of an agreement by which the creditors agree to abandon their claims in consideration of receiving a composition on their debts, that is, a smaller sum bearing an agreed proportion to the amount of their respective claims.2 Or it may take the form of an assignment by which the debtor assigns the whole of his property to a trustee for the realisation and rateable distribution of the proceeds amongst all his creditors, or amongst those who assent to and take the benefit of the assignment, and the creditors, in consideration of such assignment, release their original claims and accept the dividend payable under the agreement in discharge of their debts.3 The difference between these two methods is that while a simple composition agreement does not, of itself, operate as an Act of insolvency, an assignment amounts to an act of insolvency.4-5
But it is not open to every creditor to base an insolvency petition upon it. Thus, a creditor who has been a party or privy to the assignment is estopped from setting it up as an act of insolvency. It should be noted that the assignment must be for the benefit of all creditors; otherwise it may amount to a fraudulent preference, which is an act of insolvency on which any other creditor may base a petition.
1. Mulla Insolvency Law, (1958), p. 341.
2. Mulla Insolvency Law, (1958), p. 341. (56, 57).
3. See (a) Malackchand v. Manila!, 1904 ILR 28 Bom 354 (367-368); (b) Hatton (in re:), 1872 LR 7 Ch App 723 (726).
4. Section 9(a), Presidency-towns Insolvency Act; Section 6(a), Provincial Insolvency Act.
5. Section 1(1)(a), Bankruptcy Act, 1914 "conveyance or assignment".
35.4. Analogous article-Article 38-Letter of Licence.-
Composition agreements of both the classes1 are covered by the article in the Stamp Act. In addition, it covers instruments providing for inspectors and for continuance of business under letters of licence. An analogous article2 levies a duty of 10 rupees on a. "letter of licence"-i.e. an agreement that the creditors shall, for a specified time, suspend their claims and allow the debtor to carry on business at his own discretion. In England, letters of licence are, by the Deeds of Arrangement Act,3 required to comply with certain formalities prescribed by statute.
1. Para. 35.3, supra.
2. Article 38.
3. Section 1(2)(c) and (d), Deeds of Agreement Act, 1914 (English); Williams on Bankruptcy, (1958), p. 368.
35.5. After this preliminary discussion, we shall proceed to consider the various instruments to which Article 22 applies.
35.6. Assignments and compositions.-
Out of the four categories mentioned above1 assignments and compositions may be taken together.. In a Madras case2, a debtor and the firm of which he was a member had been adjudicated bankrupts in Mauritius, and a receiver appointed by the court. Subsequently, the creditors met, and resolved that if the adjudication was annulled, a composition payable by instalments be accepted in full satisfaction of their debts, and that the bankrupt's estate be assigned to that firm, and the plaintiff be appointed trustee to carry out such agreement. An instrument was executed to give effect to this resolution, which was also approved by the insolvency court. The court ordered that the bankrupt's estate should vest in the plaintiff, who was appointed trustee to carry out the composition, with full powers of realisation.
The plaintiff now sued to recover the moveable and immovable property of the bankrupt in India. The Court held that the transaction substantially amounted to a transfer by the debtors of their property for the benefit of their creditors, and had been duly stamped as a composition deed. In a Bombay case,3 it was held that the deed in question fell under the first class. In this case, the debtor, with the consent of the creditors, executed a deed making over all the specified assets to certain named creditors. The creditors coming in by a particular date under the deed agreed that after all the goods and properties had been made over to the trustees, no other claims with regard to the amounts due to them should remain outstanding against the debtor.
The deed also provided that the trustees were to manage the properties for the benefit of the creditors, and the money realised from time to tune was to be distributed among such creditors in proportion to their claims. Subsequently, in a suit brought by the trustees to recover possession of a house comprised in the deed, the question arose whether the deed was a composition deed. The Appellate Court held that the deed was a composition deed, as it fell within class (1) of the definition in Article 22 as an instrument executed by a debtor whereby he conveys his property for the benefit of his creditors.
1. Para. 35.1, supra.
2. Subbaraya v. Vyttualinga, 1893 ILR 16 Mad 85.
3. Chandrashankar v. Bai Magan, 1914 ILR 38 Bom 576: AIR 1914 Bom 55 (56).