Report No. 26

16. Relation back.-On the question as to the date from which an order of adjudication should take effect, there is difference between the law as enacted in section 37(1) of the Bankruptcy Act, 1914 and section 51 of the Presidency Act on the one hand, and that embodied in section 28(7) of the Provincial Act on the other. Under the English law, the order of adjudication relates back to the date of the act of insolvency and to the earliest of such acts if there is more than one. That is also the law under section 51 of the Presidency Act. But the Provincial Act has made deliberate departure from this position and enacts that the order shall relate back to the date of the presentation of the petition. Such a provision was first enacted in the Provincial Insolvency Act, 1907 (3 of 1907). The reason for the departure from the English law was stated in the Legislative Council in the following words:-

"The English doctrine that it may have the effect of avoiding certain questionable transactions is a departure from the general rule that a decree or order relates back only to the commencement of the list".

On this reasoning, it was enacted that the order should relate back only to the date of the petition, and that position was re-iterated in section 28(7) of the Act of 1920.

17. The principle behind the doctrine of relation back is explained by Mulla as follows1:-

"It is not uncommon for debtors on the eve of insolvency to transfer their property to others to defraud their creditors. Justice to the creditors requires that such transfers should not be allowed to stand and it is for this purpose that the title of the Official Assignee or Receiver is made to relate back to a date earlier than the date of the order or adjudication."

Having this principle in mind, we think that in the conditions prevailing in this country the provisions of the Presidency Act in this respect are better suited to achieve the object in view than those of the Provincial Act. Insolvency law is intended for an honest debtor. But unfortunately several dishonest debtors take advantage of the insolvency law in this country for the purpose of getting rid of their debts and at the same time concealing a substantial part of their property from the creditors. Relation back of insolvency to the date of the presentation of the petition does not serve any useful purpose, because it is rarely that an insolvent dishonestly transfers his property after the presentation of the petition.

Mulla has observed, that the provisions of the Provincial Act on this subject are open to objection on the ground that they afford protection to a large number of transactions entered into by the debtor on the eve of insolvency to the detriment of his creditors. In the Presidency Act as originally introduced the Legislature, it was provided that insolvency should relate back to the date of the presentation of the petition. But on the representations made by the High Courts of Calcutta and Bombay, the relevant provision was altered in the Select Committee on the lines of the English Act2. The Bombay High Court in its objection made the following point3:-

"The title of the Official Assignee should be made to relate back to the act of insolvency because in the case of many traders' insolvencies, the insolvent has been contemplating the possibility of adjudication order for several months before it is actually made and has been making preparations for disposing of his property to guard against such a contingency. His preparations would to a large extent be frustrated if the title of the Official Assignee is related back as it does under the English Act."

We think4 that these observations have considerable force and have as much validity now as they had when the 1909 Act was being enacted. We may point out that in actual practice, the doctrine of relation back as enunciated in the Presidency Act does not work any hardship, because bone fide transactions are always protected5.

1. Mulla Law of Insolvency in India, (1958), p. 574.

2. Mulla Law of Insolvency in India, (1958), p. 27, middle.

3. See the Report of the Select Committee for the 1909 Act and Appendix thereto.

4. See App 1, clause 23.

5. Section 57 of the Presidency Act and section 55 of the Provincial Act.