Report No. 26
1. General.-This corresponds to section 33(1), proviso, and section 34 of the Provincial Act and section 46, Presidency Act.
2. Debts incurred before adjudication with notice, etc.-An important point which arises is the question of debts incurred before adjudication with notice of presentation of petition. The question to be determined is, whether such debts should be provable in insolvency and should be extinguished on the discharge of the insolvent.
There is a sharp contrast on this point between the Presidency and the English Acts on the one hand and the Provincial Act on the other, as explained below:-
(a) Presidency Act, section 46(2), and Bankruptcy Act, section 30(2).-Under section 45 of the Presidency Act, an order of discharge releases the insolvent from all debts contracted before adjudication. Section 46(2) of that Act enacts that a person having notice of the presentation of any insolvency petition by or against the debtor shall not prove for any debt or liability contracted by the debtor subsequently to the date of his so having notice. The result is, that the debt itself is provable and extinguished on discharge, but at the same time, the creditor is under a personal disability to prove it1-2.
This is also the law under the English Act. The hardship of this rule is, that the creditor can neither prove for the debt (arising after notice of bankruptcy) nor sue for it after the discharge of the debtor. He is thus totally without a remedy.
(b) Section 33(l), proviso and section 34 of the Provincial Act.-On the other hand, under the Provincial Act, all debts incurred up to adjudication seem to be provable3, though the position is not quite certain4. Though the Provincial Act, section 34, is silent on this topic, yet, in the absence of a provision similar to the one contained in the Presidency Act, it is a plausible view to take that under that section all debts and liabilities contracted up to the date of the order of adjudication could be proved, and that those debts (i.e., even debts incurred after the petition) will also stand released by the order of discharge.
That would, appear to be the construction placed upon the section by the Bombay High Court in Jamshedji v. Pestonji, AIR 1932 Born 511. The contrary view, however, was taken by a Full Bench of the Lahore High Court in Kewal Kishan v. Special Official Receiver, ILR 1940 Lah 50: AIR 1939 Lah 384 (FB). There it was held, that the order of adjudication relates back, under section 28(7), Provincial Act, to the date of the presentation of the petition, and that on a correct reading of section 28(7), and section 34 it is only debts which are contracted before the date of the presentation of the petition that are provable under the Act. The principle behind this view is, that the insolvent is as from the date of petition "dead". A hardship arising on the Lahore view is, that there is no provision saving debts contracted bona fide by a person without knowledge of the presentation of the petition.
3. The question is which of these rival provisions should be adopted. There are certain other possible alternatives also.
4. Following possible courses can be considered:-
(i) The first course is, that all debts contracted after the presentation of the petition should be left out of insolvency proceedings, that is to say, neither they will be provable in insolvency nor would an order of discharge release the debtor from his liability in respect of them.
(ii) The second course is, that the date of the order of adjudication may be taken as the determining factor, so that (irrespective of notice) debts contracted after the presentation of the petition and before adjudication would be provable in insolvency and would stand released by the order of discharge.
(iii) The third course is, that, while loans advanced or dealings had by third persons without notice of the presentation of the petition should be provable in insolvency, those which are incurred with notice of the presentation of the petition should not be "provable". (Here discharge will not extinguish the debt.)
(iv) The fourth course is, that debts incurred with notice of presentation should be neither available in insolvency nor available after discharge.
5. (i) The first course is logical; but it leaves out a large number of debts, and hence may work hardship.
(ii) The second is also logical, and appears to have been adopted in the Provincial Act. But it may be criticised as defective, inasmuch as it regards notice as irrelevant, and may encourage fraud.
(iii) A question can be asked why the third course should not be preferred and why a person advancing money with notice of insolvency should have a right to prove for the debt. The second course is based on the principle that the presentation of an insolvency petition does not deprive a person of his capacity to contract and therefore debts contracted by him should be enforceable. But if it is to be rejected, it is to be considered whether (iii) should be adopted or (iv) should be incorporated.
(iv) The fourth course, which follows section 46(2), Presidency Act and the English Act seems to be the best, and has been adopted. It might appear to be harsh, as involving the consequence that the debts become unavailable at all times5. But it is considered, that there is no reason why a person advancing money with notice of the act of insolvency should be empowered to sue upon such loans if the debtor becomes insolvent.
While thus adopting the fourth course, the proposed provision has substituted notice of act of insolvency in place of "presentation of petition" occurring in section 46(2), Presidency Act, as the relation back is to the act of insolvency6.
Other points on sub-clauses.-Sub-clauses (1) and (2)-Need no further comments. Sub-clause (3)-Needs no further comments.
Sub-clause (4)-Power to certify has been given to the Official Assignee as in the Presidency Act (instead of the court as in the Provincial Act).
Meaning of "debt"-"Debt" includes fines owing to the Government, it has been decided7 in England, under section 30(3) of the English Act.
Explanation 1.-Definition of "liability".-This follows section 46 of the Presidency Act, Explanation, defining "liability" in an exhaustive manner to include certain kinds of obligations. There is no such provision in the Provincial Act.
Explanation 2.-Is necessary, as the expression "available act of insolvency" has been used in the clause.
1. Halsbury (3rd Edn.), Volume on Bankruptcy, p. 465, para. 917; Williams (17th Edn.), p. 187. Rangnekar J. in Jamshedji v. Pestonji, AIR 1932 Born 511 (513).
2. Mulla, (1958), p. 401, para. 431.
3. Mulla, (1958), p. 401, para. 431.
4. E,g. see Jamshedji v. Pestonji, AIR 1932 Born 511 (provable) and Kewal Kishan v. Special Official Receiver, AIR 1939 Lah 384 (FB) (not provable).
5. Mulla, (1958), p. 401, para. 431.
6. Cf the suggestion in Mulla, (1958), p. 28, para. 29.
7. Pascoe (in re:), (1944) 1 All ER 593.