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Report No. 26

Clause 99

General.-This clause covers the ground traversed by section 4 of the Provincial Act and section 7 of the Presidency Act. The principal topic dealt with is, jurisdiction of the insolvency court to decide questions of titles, etc., when they are in dispute.

Jurisdiction-English practice followed.-The principal question of jurisdiction has been dealt with elsewhere1. Briefly speaking, the clause has been framed on the lines of section 105(1), English Act2, and the practice thereunder. A proviso has also been added empowering the court to refer complicated questions to civil courts.

The position under the clause will be as follows:-

(i) where the Official Assignee claims by a higher title than the insolvent, the insolvency court will have full power to decide all questions. (But its jurisdiction will not be exclusive, and in a proper case the matter may be left to the ordinary courts, e.g., where the value of the property at stake is a large one or questions of character are involved3.)

(ii) Comparison with existing Acts.-Where the Official Assignee claims only by the same right as the insolvent, the insolvency court will have no jurisdiction as against a stranger, unless the stranger submits to the jurisdiction or the amount involved is small. The restriction appears in the English Act also. Though the restriction in the English section is confined to County Courts, the High Court also follows the same practice4. The draft is, in substance, the same as section 7 of the Presidency Act, with the difference that the proviso to that section has been re-drafted, after considering Mulla's comments5 pointing out a defect therein.

It may also be noted that even as regards matters wherein the Official Assignee has higher title, the better view under the Presidency Act is that the jurisdiction of the insolvency court is not exclusive under the Presidency Act6.

As regards the Provincial Act, though the proviso barring the trial of issues against third parties is not there in section 4, it may be noted that Mulla7 has suggested that such a proviso should be inserted in the Provincial Act also.

Sub-clause (2).-For "expedient" the clause substitutes "proper" as more apt.

"Subject to the provisions of this Act".-(a) Section 4 of the Provincial Act and section 7 of the Presidency Act begin with the words "Subject to the provisions of this Act". These are followed by a provision which empowers the court to decide all questions, whether of fact or of law, whether of title or of priority, etc. The exact meaning and scope of the words in quotations has become a matter of some controversy. At least, four interpretations have been placed on these words:-

(i) According to one view, these words mean "excluding questions otherwise provided for by the provisions of this Act". Thus it was held by the Madras High Court8 that a question under section 53, was outside the scope of section 4 and, therefore, section 75, allowing a second appeal in respect of a decision under section 4, did not apply to the determination of a question under section 53. According to this interpretation, the words in question indicate an intention not to affect the specific provisions contained in the other parts of the Act and to make it clear that the section is intended to provide for matters arising in insolvency not specifically provided for elsewhere in the Act. (One of the points made.... in the Madras decision was that in respect of matters under section 53, the Court's jurisdiction was exclusive and was not, therefore, governed by section 4.)

(ii) Another interpretation is that put in a Calcutta case9. The question in that case was, whether under section 4 of the Provincial Act, the insolvency court could deal with question of title as between the Official Receiver and strangers. The answer given by the court was in the affirmative, holding that the quoted words restricted the Court's power only to this extent, that it may not be exercised in any such manner as would be in conflict with any provision of the Act. In other words, by the use of these words, "no limitation has been imposed upon the authority of a provincial court of insolvency to entertain and decide questions of title arising out of insolvency proceedings".

(The Court also added, that this jurisdiction was not exclusive and that the Court should ordinarily decline to go into questions of title against strangers where the Receiver claimed no higher right than the insolvent; but what was stressed was that, if the Court in its discretion chose to determine the question, the decision was not bad on the ground of want of jurisdiction.) By way of illustration the Court observed, that one of the provisions to which section 4 is subject is section 56(3). The court could not direct any person to deliver up property in his possession to the Official Receiver, unless the insolvent himself was entitled to immediate possession.

(iii) The third interpretation is that placed by the Allahabad High Court10. It was argued in that case, that the words in quotations were intended to limit the jurisdiction of the insolvency court in respect of transfers alleged to be fraudulent and fictitious, so that the insolvency court could not try the matter if the case did not fall within the four corners of section 53 of the Provincial Act. It was held by the majority, that this argument was not correct, and that an insolvency court could try a question of title raised on the basis of a transfer which took place more than two years prior to the adjudication. Accordingly, it was not obligatory on the receiver to seek his remedy by a regular civil suit based on section 53 of the Transfer of Property Act.

The Court held, that the words in quotations were used only to limit the power, for example, in cases governed by the proviso to section 56 (Dalal J.). King J. hinted that these words might refer to the "rules of procedure and appeal laid down in the Act itself". Further, they doubtless refer to the special rules laid down in sections 51 to 55 of the Provincial Act "meaning that the court should follow those rules whenever they are applicable. They may also refer to section 81 under which the State Government could bar the application of many provisions of the Act.

They might also refer to section 56(3)." This majority interpretation is not in conflict with (ii) above, and cites an illustration of a Madras case relating to section 5611. However, the dissenting judgment of Sen J., illustrates the difficulties which were felt by the Court. According to him, the opening words of section 4 have been deliberately used by the Legislature to indicate and define the extent of the jurisdiction intended to be conferred on the insolvency court. "The quoted words", he said, "ought to be construed in their natural and grammatical sense and ought not to be narrowed down to a mere right of appeal".

(iv) A fourth interpretation is that placed in a case decided by the Patna High Court12. The question there involved was whether, regarding benami and fictitious transfers effected more than two years before the insolvency, the insolvency court had jurisdiction. The answer given by the Court was in the affirmative. According to the Court, "section 4 is controlled by section 53 only in respect of transfers made by the insolvents". Section 53 deals with a real transfer whereby title had passed to the transferee. Since the transactions in issue were alleged to be no transfers at all, section 53 had no application. The contention that the words in quotations indicated that the Court was bound by the limitations imposed by section 53 was rejected as not sound.

(Compare the Bombay case on the subject13, which decides that a second appeal does not lie against an appellate order setting aside an adjudication, as such an order is not one under section 4.)

To state the matter more clearly, as laid down in a Nagpur case14, if sections 53 and 54 of the Insolvency Act are to be taken advantage of, the rule of two years or three months will apply. If they are not to be taken advantage of, then, though the remedies can be pursued under the ordinary law, still they can be pursued in the Insolvency Court also (the Insolvency Court, of course, having power to refer the parties to a civil suit on the ground of expediency).

As regards the words "subject to", etc., the court pointed out, that "section 4 travels much wider than the small class of litigation which centres round fraudulent transfers, and so does the Provincial Insolvency Act. All that these words mean is that where the Act otherwise provides the Insolvency Court is not to act as a civil court. For example, attachment of the insolvent's property is not necessary. It all vests in the receiver or the Court automatically So also as regards appeals and revisions. And so forth."

(b) In view of the difference of opinion among the various High Courts the question whether an improvement in wording should be attempted, has been considered. In the Madras case15, the Court observed that the words in question "do not appear to be very happy words". It is, however, considered unnecessary to recommend any change. The shades of meaning attaching to these words cannot be covered by other phraseology.

(Note.-The particular narrow question as to the inter-relationship of sections 4 and 53 of the Provincial Act is itself not of much importance, since the majority of the courts have held, that the insolvency court has jurisdiction to entertain under section 4 questions affecting transfers not falling under section 5316.)

Power to sell properties.-Omission of section 4(3), Provincial Act.-It will be noticed that section 4(3) of the Provincial Act provides for the sale of the property of the debtor when the court has reason to believe that he has a saleable interest in it. This sub-section will have application only when there is a dispute as to the title of the debtor. The question is, whether it is expedient to provide for a sale under these circumstances.

The purchaser in such a sale cannot be expected to pay anything like a reasonable price for the property, as in effect it will be the purchasing of litigation and it is against the policy of the law to countenance such sales. The only reason for such a provision might be, that it will help a speedy administration of the estate. It is also felt that that is hardly a sufficient reason for authorising such a sale. The interests of the creditors would be protected by postponing the declaration of the final dividend until the title of the insolvent has been finally decided. Section 4(3), Provincial Act has, therefore, been omitted.

1. See the body of the Report, paras. 10-12.

2. See Mulla, (1958), p. 43, for a statement of the English practice.

3. Cf. Mulla, (1958), p. 56.

4. Mulla, (1958), p. 58, para. 62C, end. See also Williams, p. 468.

5. Mulla, (1958), p. 22, bottom.

6. Mulla, (1958), p. 56.

7. Mulla, (1958), pp. 24, 67, 68.

8. Alagiri Subba v. Official Receiver, ILR 54 Mad 989: AIR 1931 Mad 745 (746) right hand column and 749, right hand column.

9. Radhakrishna v. Official Receiver, AIR 1932 Cal 642 (646), right hand column, and p. 648, right hand column.

10. Anwar Khan v. Muhammad Khan, (1929) ILR 51 All 550 (557) (Dalai J.), 573 (King J.; dissenting judgment of Sen J. discusses the point at p. 565.

11. Chittammal v. Ponnuswami, 1926 ILR 49 Mad 762: AIR 1926 Mad 363.

12. Biseswar Chaudhuri v.Kanhai Singh, ILR 11 Pat 9: AIR 1932 Pat 129.

13. Kantilal v. Rajni Kant, ILR 1942 Bom 175: AIR 1942 Born 159 (160) right hand column; (Broomfield and Wassoodew JJ.).

14. Vinayak Shamrao v. Moreshwar Ganesh, ILR 1944 Nag 342: AIR 1944 Nag 44 (Niyogi, Vivian Bose and Sen JJ.).

15. Alagirisubba v. Official Receiver, 1931 ILR 54 Mad 989: AIR 1931 Mad 745 (746) left hand column (Reilly J.).

16. See Mulla, (1958), pp. 61-62, cases cited in foot-notes (j), (k) and (1).

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