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Report No. 26

10. Jurisdiction of Insolvency Courts (Claims arising in bankruptcy).-At the outset, it will be useful to set out briefly the evolution of the jurisdiction of insolvency courts. Before the Bankruptcy Act, 1869, Bankruptcy Court in England had no jurisdiction to decide questions of title in which third persons were interested, unless they submitted to the jurisdiction of the Bankruptcy Court. (Vide section 12 of the Bankruptcy Act, 1849). Section 72 of the Bankruptcy Act, 1869, conferred jurisdiction on the Bankruptcy Court to decide all questions, whatsoever, for doing justice to the parties and for effectively administering the estates of bankrupts.

That section was couched in such wide terms that the Bankruptcy Court could exercise jurisdiction to decide all questions of title in which the rights of third parties were involved. In construing this section, the courts, however, drew a distinction between claims arising in bankruptcy and claims not arising in bankruptcy. The former comprised transactions which could not be impeached but for the special provisions of the Bankruptcy Act. The right of the trustee in bankruptcy in those claims rests on a title superior to that of the bankrupt. The following are some of the matters in which the trustee in bankruptcy is said to have a higher title than the insolvent1:-

(i) transfers of property by the bankrupt made between the commencement of the bankruptcy and the date of the order of adjudication which come within the jurisdiction of the Bankruptcy Court by virtue of the doctrine of relation back;

(ii) possession by the bankrupt of goods of other persons to which the Trustee in bankruptcy is entitled by operation of the doctrine of reputed ownership;

(iii) transfers within two years of the bankruptcy not made in good faith and for valuable consideration;

(iv) transfers by way of fraudulent preference in favour of creditors;

(v) transfers which are in themselves acts of bankruptcy.

Claims not arising in bankruptcy are those claims against third parties in respect of which the Trustee in Bankruptcy has no superior title than the bankrupt himself and which he can enforce against such parties only under the ordinary law and in the ordinary courts. As regards claims arising in bankruptcy the Courts in England held that though they should normally be tried by the Bankruptcy Court2, the ordinary civil courts had also jurisdiction over the same3. As regards claims not arising in bankruptcy the Courts in England took the view that they should be tried by the ordinary courts unless the parties thereto submitted to the jurisdiction of the Bankruptcy Court4.

This was the position under section 72 of the Bankruptcy Act, 1869. The Bankruptcy Act, 1869 was replaced by the Bankruptcy Act, 1883, and section 102 of the latter Act was with certain modifications a re-enactment of section 72 of the former Act. In 1914 a new Bankruptcy law was enacted which repealed the Act of 1883. Section 105 of the Act of 1914 corresponds to section 102 of the Act of 1883. Judicial decisions' under the Bankruptcy Acts of 1883 and 1914 reaffirmed the principles which had been laid down in the construction of section 72 of the Act of 1869.

1. Cf. Mulla Law of Insolvency in India, (1958), p. 40.

2. Vide the observations of James L.J. in ex parte Armitage, 17 Ch D 13.

3. Vide Sharp v. McHenry, 55 LT 747 and Re Evelyn, (1894) 2 QB 302.

4. Vide Ellis v. Silber, LR 8 Ch App 83; Ex parte Dickin, 8 Ch D 377; Ex parte Musgrave, 10 Ch D 94; Ex parte Brown, 10 Ch D 148; Ex parte Fletcher, 9 Ch D 381; Ex parte Davies, 19 Ch D 86.

11. The relevant provisions of the two Indian Acts are section 7 of the Presidency Act and section 4 of the Provincial Act. Although the language of section 7 of the Presidency Act is quite general, the Calcutta High Court1 held that the Insolvency Court should decline to entertain claims against third parties which do not arise in insolvency. A similar view was taken under the Provincial Act by a majority of the High Courts2. The Madras High Court, however, took the view that the Insolvency Court had jurisdiction under section 7 of the Presidency Act to decide all questions between the Official Assignee and strangers, even though the latter did not submit to the jurisdiction of the Insolvency Court.

The conflict was set at rest by the amending Act3 of 1927 which inserted a proviso to section 7 of the Presidency Act and also amended subsections (4) and (5) of section 36 of that Act. The net result of these amendments was that where proceedings were taken against a stranger under section 36 of the Act and he denied the claim of the insolvent, the Insolvency Court had no jurisdiction to decide the claim. In other words, the view of the Calcutta and Bombay High Courts which was in accordance with the English practice was preferred to that of the Madras High Court. Subsequent to the amendment of 1927, a question arose whether the Insolvency Court could entertain claims against a stranger where the stranger had not been examined under section 36.

It was held by the Madras High Court4 that the proviso to section 7 introduced by the amending Act of 1927 restricted the jurisdiction of the Insolvency Court only in those cases where there had been examination under section 36, and that when there was no such examination, the language of section 7 was wide enough to confer the necessary jurisdiction on the High Court. In another Madras case5 it was further held, that even when there was an examination under section 36, the jurisdiction of the Court to decide matters outside the scope of inquiry under that section was not barred by the proviso to section 7. The Bombay High Court took the view6 that though the proviso to the section applied only when there was examination under section 36, even when there was no such examination the court should in the exercise of its discretion decline to entertain a claim against a stranger unless he submitted to its jurisdiction.

The Provincial Act of 1907 did not contain any provision corresponding to section 7 of the Presidency Act. There was, accordingly, a conflict of opinion as to whether a disputed claim against a stranger could be tried by the Insolvency Court. The question was answered in the affirmative by the Allahabad High Court in Bansidhar v. Kharagjit, 1915 ILR 37 All 65 and in the negative by the Calcutta High Court in Nilmoni Chowdhury v. Durga Charan Chowdhury, (1918) 22 CWN 702. It was to set at rest this conflict that section 4 of the Provincial Act of 1920 was enacted.

This section gives effect to the view of the Allahabad High Court and confers jurisdiction on the insolvency court to adjudicate claims against third parties. It will be observed, that on the language of section 4, the Insolvency Court is empowered to decide question of title against a stranger even when the stranger disputes that title and does not submit to the jurisdiction of the insolvency court. To this extent section 4 differs from section 7 and section 36(4) and (5) of the Presidency Act.

1. Jnanendra Bala Devi v. Official Assignee, ILR 54 Cal 251: AIR 1926 Cal 597.

2. Naginlal Chunilal v. Official Assignee, ILR 35 Born 473; Doraiappa lyer v. Official Assignee, 42 MLJ 41; Official Assignee Madras v. Official Assignee, Rangoon, AIR 1925 Mad 141.

3. Act 11 of 1927.

4. Official Assignee, Madras v. Narasimha Mudaliar, ILR 52 Mad 717.

5. Chinnappa v. Official Assignee, 1932 ILR 55 Mad 385: AIR 1932 Mad 167.

6. Balubhai Kallianchand (in re:), AIR 1942 Born 118: 44 Born LR 171.

12. We have carefully considered this matter, and we think that having regard to general legal principles, the provisions of section 7 of the Presidency Act are to be preferred to the provisions of section 4 of the Provincial Act. We are fortified in our opinion by the view expressed by Mulla1 that the provisions of section 4 of the Provincial Act should be brought in line with the provisions of section 7 of the Presidency Act. Insolvency jurisdiction is a special jurisdiction, and such jurisdiction should not be extended beyond what is strictly necessary for the purpose of administering the insolvency law. Third parties are strangers to an insolvency, and they should not be dragged to the insolvency court against their will.

To give an illustration, if A is adjudged insolvent by a court in Delhi and A has a claim against B, who ordinarily resides in Trivandrum, it will be great hardship upon B if the Official Assignee could enforce his claim against B in the insolvency court in Delhi. Moreover, if the insolvency court is given jurisdiction in respect of claims against third parties, the Official Assignee could enforce such claims without payment of any court fee. We, however, see no harm if small claims, not exceeding Rs. 5,000 in value against2 third parties are determined by the insolvency court.

1. Mulla Law of Insolvency in India, (1958), p. 24, para. 26.

2. App I, clause 99.

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