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Report No. 26

Clause 57

General.-Compare and contrast section 55 of the Provincial Act and section 57, Presidency Act.

"Good faith".-The word "bona fide" appear in the marginal note to the section in both the Presidency and Provincial Acts. Though the words do not occur in the body of the section, it is considered that the transaction to be protected, must be entered into in good faith (apart from want of notice as provided under the proviso). That has been made clear1.

The history of the provision in English law is this section 133 of the Bankruptcy Act, 1849, contained the words "bona fide". They were replaced by the words "in good faith" in sections 94 and 95(1) of the Bankruptcy Act, 1869. In section 49 of the Bankruptcy Act, 1883, neither of these expressions was reproduced. But the marginal note continued the words "bona fide"2. It is this language that has been adopted in section 55 of the Provincial Act and section 57 of the Presidency Act3.

Strictly speaking, the words occurring in a marginal note should not be used for the purpose of controlling the interpretation which would be proper on the language of the section itself. It should, therefore, follow that a transaction will be protected under the section if it satisfies the two conditions specified in the proviso, namely, that it takes place before the date of the order of adjudication and the person with whom the transaction takes place has not, at that time, notice of the presentation of an insolvency petition.

The question whether a transaction will be protected under this section when it lacks bona fides even though the two conditions specified therein be satisfied has been the subject of judicial decisions. In the Mercantile Bank of India Ltd. v. Official Assignees, 1916 ILR 39 Mad 250, the creditor received a notice from the debtor's agent that the debtor was going to suspend payment and thereafter took possession of the debtor's goods pursuant to a letter previously given by him. The question was, whether this was protected by section 57 of the Presidency Act. It was found, that at that time no insolvency petition had been presented.

Therefore the conditions specified in section 57 were satisfied. But the court, nevertheless, held that the transaction was not protected, because, having regard to the notice received from the debtor's agent, the action of the creditor could not be said to be bona fide as that was notice to him that an act of insolvency was being committed. Adverting to the contention that the words "bona fide" did not occur in the body of the section, the court pointed out, that on the corresponding provision of the English statute it had been held in a series of authorities in England that bona fides also should be established before protection under that section could be claimed; and (following those authorities) it was held that the transaction was not protected by section 57, for the reason that it was not bona fide.

This decision has been criticised as not warranted on the language of the section4-5, but there can be no doubt that the conclusion reached therein is just and equitable and in accordance with the principle on which Insolvency Law is based. To remove doubts and uncertainties, the words "in good faith" have been inserted.

Notice of "petition" or "act of insolvency".-The proviso to section 57, Presidency Act, speaks of the transaction having been entered into without notice of presentation of the "petition". This is inconsistent with the scheme of relation back as adopted in that Act6. Hence it has been changed to notice of "available" act of insolvency7. (Compare section 45, proviso, English Act and section 167). The inconsistency in the existing section 57, Presidency Act has been noted in one decision also8.

Bona fide transferees from transferees.-The question whether9 the protection should be extended to a transferee taking property bona fide from a transferee (where the intermediate transferee did not act in good faith) has been considered. It is, however, not thought proper to make such a provision, as it would be illogical to protect a subsequent transferee, when the intermediate transferee (from whom he derived title) is not protected.

Opeiting words.-The elaborate wording in section 57, Presidency Act and in section 55, Provincial Act, referring to the "foregoing" provisions relating to the effect, etc., has been retained.

Bankers.-The question of granting protection to bankers on the lines of section 97, Australian Act [and section 47(1), last para., English Act] has been considered, but no such further protection appears to be necessary, in addition to that conferred by the new clause10 corresponding to section 46, English Act11.

1. See also body of the Report, para 24.

2. Whether good faith is required in England is slightly doubtful at present. See Williams, pp. 245, 366, 370 and Re Seymour, 1937 Ch 668: (1937) 3 AER 449.

3. Discussion in Mulla about history is at p. 645, para. 653(1).

4. See discussion in Mulla, (1958), p. 650, para. 656.

5. Cf. Surya Kumar v. Bijay K. Hazra, ILR (1937) 1 Cal 557 (566) (Lord Williams J.).

6. Mulla, (1958), p. 26, para. 29, p. 28 (discussion as to protected transactions may be seen). Also see p. 649, para. 656(3).

7. See also body of the Report, para. 24.

8. See Surya Kumar v. Bijay K. Hazra, ILR (1937) 1 Cal 557 (564) (Lord Williams J.).

9. Cf. Mulla, (1958), p. 656 top, para. 665, (Regarding transferees from donees, see p. 620, para. 625).

10. Clause 58.

11. See also the body of the Report, paras. 24-25.

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