Report No. 26

Clause 16

General.-This deals with disposal of a petition filed by the creditor.

Sub-clause (1).-This corresponds to section 25(1), Provincial Act, section 13(4), Presidency Act.

Sub-clause (2).-This corresponds to section 27(1), part, Provincial Act, section 13(5), Presidency Act. The words "may make" have been used, following the Presidency Act1, [This is a departure from section 27(1) of the Provincial Act, which uses the word "shall".]

Section 13(5) of the Presidency Act contains the words "unless in its opinion the petition ought to have been presented before some other court", etc. These have not been adopted, because under the provisions of the Civil Procedure Code, a court has powers to return a plaint, etc., wrongly presented to that court.

Sub-clause (3).-This deals with the procedure to be adopted when the debtor denies the debt-either its existence or amount. The position under the two Acts at present is as follows:-

Dispute as to debt.-Section 13(6) and (7) of the Presidency Act provides that if there is a dispute as to the truth of the debt or about its quantum, the insolvency court might stay its hands until the debt is established in appropriate proceedings. There is nothing corresponding to it in the Provincial Act.

In Gopikabai v. Chapsi, 1935 ILR 59 Bom 161: AIR 1935 Born 80 it was held by the Bombay High Court that even under the Provincial Act the insolvency court had the power to stay the proceeding and refer the matter for adjudication to a civil court. The contrary view2 has been taken by the Madras High Court in Gangi Reddi v. Narasimha Reddi, ILR 1942 Mad 147: AIR 1941 Mad 895, and by the Nagpur High Court in Deorao Raoji v. Ramji Baheraji, ILR 1953 Nag 608: AIR 1953 Nag 189 and Shriram Latuji v. Saolaram Govind, ILR 1953 Nag 625, and by the Lahore High Court in Hukam Chand v. Ganga Ram, AIR 1927 Lah 111.3 (In Wazir Singh v. Janki Das, AIR 1926 Lah 679, the Lahore High Court has held that when a question is raised as to whether a property alleged to have been fraudulently alienated by the debtor belongs to him or not, the insolvency court must decide the question and should not refer it to the Civil Court.)

The question is which view should be adopted. On the one hand, if the insolvency court is made powerless to decide the dispute, the proceedings may be delayed. On the other hand, where there is a bona fide dispute, there is a possibility that the insolvency court may be used by a scheming creditor as a weapon to harass the debtor. It is considered that the insolvency court should have a discretion in the matter, and should determine which of the following two courses should be adopted, namely,-

(a) deciding the question of debt; or

(b) staying the proceedings pending trial of that question, provided the debtor furnishes security to the court's satisfaction.

The sub-clause has been drafted on these lines.

Sub-clause (4).-This is linked up with stay of proceedings for deciding the question of debt.

"Shall" and "may" (Further discussion).-Under the English law, it has been held that though an order of adjudication will ordinarily be made when the conditions mentioned in the section are satisfied there might be special grounds for declining to pass such an order, as for example, (1) when there are no asset to be distributed, vide Re Betts, (1897) 1 QB 50; Re Otway, (1895) 1 QB 812, or (2) where the petition is filed for other purposes than securing distribution of the assets, such as extorting money, vide Re Larard, Mans 317. These principles have been followed by the High Courts in India in deciding petitions under section 13(4)(b) of the Presidency Act.

In Nagiah v. Suryanarayana, ILR 1944 Mad 21: AIR 1943 Mad 355,4 the creditor's petition was dismissed on the ground that the motive behind the petition was not payment of the debt which could be obtained out of the fund in court, but injuring the credit of the debtor. See also Ex parte Harsukdas Balkishen Das, AIR 1924 Cal 964. But in a case under the Provincial Act-Chatrapat Singh v. Kharag Singh, (1916) 44 IA 11: 1917 ILR 44 Cal 535 PC, the question arose whether an insolvency petition could be dismissed on the ground that it was an abuse of the process of court even though all the statutory conditions had been fulfilled. It was held by the Privy Council, in reversal of the decision of the Calcutta High Court, that the debtor had a right ex debito justitiae to have an order of adjudication when the conditions are satisfied5.

Apparently, while under the Presidency Act, the court has a discretion in all cases, under the Provincial Act it has no discretion in the case of a debtor's petition, though perhaps it has in a creditor's petition under the wording "sufficient cause" in section 25(1).

Now the question is whether the court should have discretion in the matter of passing an order of adjudication or not. On the word "shall", in section 27(1) of the Provincial Act, the court will have no discretion. If the word "may" is substituted for the word "shall", then the court will have a discretion. It is desirable that the courts should be given discretion to pass an order of adjudication or not. The normal rule will undoubtedly be that when the conditions are satisfied, the order of adjudication would be made, and it is only when exceptional circumstances exist that the court would decline to pass such an order. The courts can be trusted to exercise their discretion in accordance with the well-settled practice.

1. See discussion below, "shall" and "may".

2. See discussion in Mulla, (1958), p. 191, para. 198.

3. See also A.K.R.M.C.T. Chetty Firm v. Maung Aung, AIR 1923 Rang 21.

4. applied in Ramalinga v. Ratna, AIR 1963 Mad 181 (May issue).

5. See also Mulla, (1958), p. 171, para. 166, p. 173, para. 167, p. 181, para. 181 and pp. 207-208, para. 223.