Report No. 26
6. Insolvency jurisdiction of subordinate courts and appeals.-Under the Proviso to section 3(1) in the Provincial Act, the State Government is empowered to authorise subordinate courts to exercise insolvency jurisdiction. Where a subordinate court exercises such jurisdiction, an appeal lies under section 75 of that Act to the District Court. We feel that in view of the serious consequences which flow from a person being adjudicated insolvent and the complicated questions of law and fact which usually arise in insolvency matters, appeals in such cases should lie to the High Court. There are two ways of achieving this object-
(i) providing an appeal direct to the High Court, and
(ii) placing a limitation on the jurisdiction of subordinate courts.
The second course involves the difficulty of finding a satisfactory method of limiting the jurisdiction. Two tests can be applied for this purpose-
(i) the quantum of debts of the insolvent, and
(ii) the value of the property of the insolvent distributable among his creditors.
There is one basic objection to adopting the first test. The idea of limiting the jurisdiction is that at least in large insolvencies an appeal should lie to the High Court. A question accordingly arises, what is a large insolvency? Is an insolvency where the debts of the insolvent amount to one lakh of rupees but the insolvent's property is worth only Rs. 2,000 a large insolvency? In such a case the stakes are not high. The creditors will at the most get a dividend of two naye paise in the rupee and no complicated questions of title, etc. are likely to arise in view of the negligible value of the property of the insolvent. Apart from this basic objection, there are also some practical difficulties.
One practical difficulty is pointed out in a case of the Rangoon High Court1. The petitioning creditor in that case filed an insolvency petition in the district court alleging that the debt due to him from the respondent amounted to Rs. 15,947-1-9. Under a notification issued under the proviso to section 3 of the Provincial Insolvency Act, 1920 which at that time applied to Burma, the district court had jurisdiction if the amount of debts exceeded Rs. 15,000 while if the amount of debts was less than Rs. 15,000 the Assistant District Court had jurisdiction. The debt due to the petitioning creditor was alleged to consist of two items-(1) Rs. 8,029-9-9 due on three promissory notes, and (2) the sum of Rs. 7,917-8-0 due under a registered mortgage.
It, however, appeared from the petition that on the date of the petition a mortgage suit in respect of the second item was pending. In these circumstances the district judge refrained from taking further steps in the proceedings until the result of the mortgage suit was known. After the mortgage suit was dismissed, the amount of the petitioning creditor's debt was reduced to Rs. 8,029-9-9. The district judge, accordingly, transferred the proceedings to the Assistant District Court. An adjudication order was passed by the Assistant District Court. Subsequently, it appeared that the total debts of which proof was submitted in the insolvency amounted to Rs. 15,707.
An application, however, was made by the Receiver in insolvency that certain debts alleged to be due by the insolvent to the petitioning creditor might not be admitted. The application of the Receiver was dismissed by the Assistant District Court. Against the order dismissing the application the Receiver appealed to the district court. On appeal, the District Judge reduced the amount of the debts which ought to be admitted by Rs. 3,052, thereby reducing the total amount of debts of which proof was admitted to a figure less than Rs. 15,000. The Assistant District Court had further held that it had no jurisdiction in the matter inasmuch as the debts of the insolvent exceeded Rs. 15,000. On appeal from the order, the District Court, in the events that happened, namely, that the debts of which proof was admitted amounted to less than Rs. 15,000, allowed the appeal and held that the Assistant District Court had jurisdiction. Page C.J., while delivering judgment on the case made the following observations:-
"The mere recital of the nature of the proceedings that have taken place and the orders that the Assistant District Court and the District Court were compelled to pass in the circumstances discloses a situation full of humour though for those concerned in insolvency proceedings the humour is grim."
While construing the notification in question Page C.J. further observed:-
"The effect of accepting this construction of notifications 37 and 207 is that the court may or may not possess jurisdiction to hear an insolvency proceeding at any particular time according to the amount of the debts of the insolvent that at that particular time may appear to be outstanding. The present case is a simple but cogent illustration of the situation that results from the issue of these notifications, and, if the Court were at liberty to express an opinion upon a matter of policy, it would appear advisable that steps should be taken by amending either the Burma Courts Act or the Provincial Insolvency Act in order that an end should be put to the present impasse".
Dunkley J. who concurred in the judgment made the following observations:-
"Debts of the insolvent must clearly mean the debts admitted or proved in the proceedings; the expression cannot include secured or doubtful debts which may or may not become provable at some subsequent stage; for, if so, the jurisdiction of the Assistant District Court will always remain in doubt in every insolvency case. It is urged that the effect of this construction of the expression is that in any particular case the Assistant District Court may have jurisdiction at one time and not at another, and that in consequence several transfers of the case between the District Court and the Assistant District Court with their attendant evils of prolonged duration and uncertainty, may occur.
I agree that this is so, and that in an insolvency case uncertainty as to the court having 'original jurisdiction is most unfortunate as it entails uncertainty as to the court to which appeals lie; but it is impossible to devise any form of notification which will entirely remove this uncertainty, and if I may make the suggestion, in my opinion the only satisfactory method of meeting the difficulty is by an amendment of the Burma Courts Act, to make all appeals, of whatever kind, from the Assistant District Court lie direct to the High Court".
It is true that the difficulty pointed out by the Rangoon High Court could perhaps be met by a suitable wording of the notification. Instead of the word 'debts' the words 'alleged debts' may be used2. But then the creditors could by inflating or undervaluing their debts choose their forum and the debtor will have no voice in the matter. Apart from the difficulty pointed out by the Rangoon High Court there is a further difficulty. A petitioning creditor will, for the purpose of jurisdiction of the court, have to state in his petition the aggregate amount of debts due from the debtor. Will he be in a position to do so? The debts which are due from a debtor will be known only to the debtor himself.
The law, therefore, requires the debtor and not the petitioning creditor to file a schedule of creditors. In a vast country like India, the creditors of a debtor may be spread over a number of places, and it will not, therefore, be possible for the petitioning creditor to know who are the other creditors of the debtor and much less the amount of their debts. In the absence of such information a petitioning creditor would not know in what court to file the petition. Application of the first test, therefore, gives rise to several complications.
The second test relating to the value of the property of the insolvent distributable among his creditors has been adopted in relation to summary administration of small insolvencies. But in the case of summary administration of an insolvency no question of jurisdiction arises. After a petition is admitted, the court if it is satisfied by affidavit or otherwise that the property of the insolvent does not exceed a particular value may make an order that the insolvent's estate be administered in a summary manner3.
The value of the insolvent's property is relevant only for the purpose of determining the manner in which the insolvent's estate is to be administered and not for the purpose of the jurisdiction of the court in which the petition for insolvency is to be presented. If this test is adopted for the purpose of determining the jurisdiction of subordinate courts, the petitioning creditor will be faced with the same difficulty which he will experience if the first test is adopted. It will be difficult for him to ascertain the value of the property of the insolvent at the time of the presentation of the petition. For these reasons, it appears to us that the second course, though desirable in some respects, is not practicable.
We, therefore, recommend4 the adoption of the first course, that is to say, that an appeal should lie direct to the High Court from certain decisions and orders of a subordinate court exercising insolvency jurisdiction. In this connection, we may refer to section 4A of the Guardian and Wards Act, 1890, under which the High Court is empowered to delegate jurisdiction to subordinate courts. Under section 47 of that Act, when a case is decided by a subordinate court in exercise of its delegated jurisdiction, an appeal lies to the High Court.
We appreciate that our recommendation has the drawback, that even in a small matter an appeal will lie to the High Court. We, therefore, propose that an appeal to the High Court should lie in important matters only, e.g., adjudication, avoidance of transfers etc. We may point out that, if there is no delegation of jurisdiction to subordinate courts, an appeal against certain decisions and orders at present lies to the High Court. [Section 75(2) read with Schedule I of the Provincial Act]. We recommend that only in these cases an appeal should lie to the High Court. In all other cases an appeal should lie to the District Court.
1. S.P.K. Chettyar Firm v. S. Dutt, 1936 ILR 14 Rang 280: AIR 1936 Rang 223.
2. See Gulabrao v. Yadavrao, (1958) 60 Born LR 505.
3. Presidency Act, section 106 and Provincial Act, section 74.
4. See App I, clauses 97 and 116.
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