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Report No. 26

20. Fraudulent preference.-So far as transfers by way of fraudulent preference are concerned, the Official Assignee has to prove that the dominant intention of the insolvent was to prefer the particular creditor1-2. The Blagden Committee, in dealing with this question, has made the following observations3:-

"117. Such evidence (regarding intention) may exist in an admission made by the bankrupt in the course of his public examination or otherwise, but that evidence is not admissible against the respondent to the motion. If the bankrupt is called as a witness it is most unlikely that he will admit his intent to prefer, which, apart from defeating that intent, might render him liable to a charge of having made an undue preference if he wished to obtain his discharge.

A further difficulty in the way of a successful claim against the person preferred is the fact that any evidence of intention to prefer may be rendered nugatory if the preferred creditor can show that he was threatening the bankrupt with proceedings or otherwise using pressure to obtain payment. Such evidence can often be adduced, and advantage may be taken of this rule by a debtor in order to protect the creditor he wished to prefer by stating that the creditor was in fact pressing him and threatening him with proceedings if he were not paid."

"118. It has been represented to us that the effect of the law last referred to is fundamentally wrong, and that pressure by a creditor, far from enabling him to retain the payment made to him, should have the opposite effect of rendering the payment void as against the trustee in bankruptcy, so that the creditor exercising pressure should not, by so doing, obtain an advantage over the other creditors. We appreciate the moral aspect exemplified in this view, but we cannot agree that a creditor who looks after his own interests before a bankruptcy to the extent of pressing his debtor to pay the debt owing should not obtain the benefit of his diligence."

"119. We do, however, recognise that the state of the law as it is at present is far from satisfactory, the principal reason being the difficulty of proof. We accordingly suggest that (in addition to new provisions allowing the transcript of the notes of the public examination to be used in evidence under certain conditions) there should be not only a voidable preference, as at present at any time within six months before presentation of a bankruptcy petition, but that there should also be an "absolute preference" after the presentation of a petition or during a period of twenty-one days prior thereto. This absolute preference would be void against the trustee in the bankruptcy if, in fact, the payment or transfer did prefer a creditor, without any onus resting upon the trustee to prove intent to prefer."

1. Mulla Law of Insolvency in India, (1958), p. 630. Peat v. Gresham Trust Ltd., 1934 AC 252 (262): 1934 AER 82.

2. Sine Derby and Co. v. Official Assignee, AIR 1928 PC 77, right-hand column (From Straits Settlements, Singapore) (Lord Warrington of Clyffe);

Kasi v. Official Receiver, AIR 1929 Mad 321; Kashi Nath v. Official Receiver, AIR 1931 All 142; Dina Nath v. Labhu Ram, AIR 1932 Lah 321 (Addison J.); Gopal v. Balli Rao, AIR 1937 Nag 117 (Pollock J.); Official Receiver v. Vempati Venkayya, AIR 1941 Mad 796, right-hand column (Patanjali Sastri J.).

3. Report, p. 39, paras. 117-119.

21. Section 95 of the Australian Bankruptcy Act provides that every conveyance, etc., by any person unable to pay his debts as it becomes due from his own money, in favour of any creditor or of any person in trust for any creditor having the effect of giving that creditor, etc., preference, priority or advantage over the other creditors shall be void. These words substitute an objective test for the subjective test. If there has in fact been a preference, the question of intention is immaterial. The corresponding provisions of section 64(2) of the Canadian Act proceed on slightly different lines.

The Canadian Act provides that where any such conveyance, etc., has the effect of giving any creditor a preference over other creditors or ever any one or more of them, it shall be presumed prima facie to have been made, etc., with a view to giving such creditor a preference over other creditors, whether or not it was made voluntarily or under pressure and that evidence of pressure shall not be receivable or availed to support such transaction. We have considered the recommendation of the Blagden Committee and the relevant provisions of the Australian and Canadian Acts, but we think that no change is called for in our law.

It is true that it is very seldom that there is direct evidence regarding fraudulent intention of the insolvent. But the court can infer such intention from the circumstances attending the transfer as established by the evidence1. In this connection, we may refer to illustration (a) to section 106 of the Indian Evidence Act, 1872, which provides that when a person does an act with some intention other than that which the character and circumstances of the act suggest, the burden of proving that intention is upon him.

In actual practice it should not be difficult for the Official Assignee to prove certain facts from which the necessary inference about intention may be drawn. Shifting the burden of proof on the transferee would give rise to another difficulty. A transfer by way of fraudulent preference is also an act of insolvency. As an act of insolvency the burden of proof lies on the creditor. We see no reason why as a fraudulent preference the rule regarding burden of proof should be different2. Such a change would result in a certain amount of inconsistency in the law.

1. Sime Derby & Co. v. Official Assignee, AIR 1928 PC 77; Peat v. Gresham Trust Ltd., 1934 AC 262: 1934 AER 82.

2. See App I, clause 55.

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