Report No. 70
Condition Making Interest Determinable on Insolvency or Attempted Alienation
19.1. Section 12, first paragraph.-
The power of the transferor to impose conditions while making a transfer of property is restricted by a further provision contained in section 12 which invalidates two kinds of conditions or limitations(i) a condition or limitation which makes any interest to cease on the person becoming insolvent; (ii) a condition or limitation making any interest to cease on a person endeavouring to transfer or dispose of the same. The reasons for invalidating the condition- in each case may be stated. In the first case, the consideration is not a purely legal one, and the aspect of public policy involved is of greater importance than in the second case.
The law does not consider it proper that while a person should, in other respects, enjoy an interest in an unrestricted manner, that interest should cease as soon as he becomes insolvent. Such a provision, it recognised, would practically defeat the law relating to insolvency, if it were to be permitted in an unqualified form, a time would come when no property would ever become available on insolvency to the creditors, because every person would get such a condition inserted in a transfer. It may not help the transferee directly, but at least it would defeat his potential creditors on insolvency.
19.2. Section 12, first paragraph-Interest terminable on alienation.-
The second condition sought to be invalidated by section 12, pertains to alienation. An attempt to transfer or dispose of an interest reserved or given to a person should not be made a ground for termination of the interest, the rationale here being that such a condition would be repugnant to the nature of the interest. The law favours the circulation of property and if an interest is once transferred, the transferee should further have power to transfer it. In any case, the transferor is not allowed to create, by private contract, a non-transferable interest and thus add to the List of things which cannot be transferred.1
1. Section 6.
19.3. Section 12, compared with section 10.-
Since the subject of restraints on alienation has also figured in section 10, it would be useful to point out that section 12, first paragraph, is in some respects wider than section 10. Section 10 applies only to restraints which are absolute-as the text goes-or restraints which are substantially absolute-as interpreted by judicial decisions. In section 12, however, a partial restraints also seems to be covered. It may also be stated that section 10 deals with a condition against alienation in the abstract, while section 12 is confined to conditions or limitations which expressly provide for cesser of an interest on an endeavour to transfer or dispose of the same.
19.4. Section 12, first paragraph and English law.-
It may be noted that section 12 enunciates an exception to the general rule enacted in sections 31 and 32, which provide that an interest "may be created" with the condition super added that it shall cease to exist on the happening of an uncertain event. Out of the range of permissible conditions, section 12, first paragraph, takes out two kinds of conditions.
19.5. English law in regard to insolvency.-
It is to be noted that in regard to insolvency, the section departs slightly from the English rule. A provision terminating the interest on bankruptcy is a common forfeiture clause in English conveyances.1 But a man cannot settle property on himself, determinable on bankruptcy. A settlement so made is void, it being fraudulent for a man so to deal with his property as to disappoint the just claims of his creditors.2-3
1. Brandon v. Robinson, 18 Ves 429;
Natton v. May, 3 Ch D 148 (152);
Machu (in re:), 21 Ch D 838;
Bedasons Trusts (in re:), 28 Ch D 523;
Metcalfe v. Metcalfe, 43 Ch D 633 CA: (1891) 1 Ch 1, distinguishing
White v. Chitty, LR 1 Eq 372; Llyod v. Llyod, LR 2 Eq 722.
2. Compare the Presidency Towns Insolvency Act (3 of 1909), section 9, clause (b); Provincial Insolvency Act (5 of 1920), section 6, clause (b).
3. Hormusji v. Dadabhoy, (1895) ILR 20 Bom 310.
(Case decided on 30th September, 1895, after the Act had been extended to the Bombay Presidency on 1st January, 1893).
19.6. Succession Act.-
The law is also different under the Indian Succession Act. Section 120 of that Act recognises the legality of a condition terminating an interest on insolvency. If "an estate is bequeathed to A, until he shall take advantage of the Act for the relief of insolvent debtors, and after that to B, B's interest in the bequest is declared to be contingent until A takes advantage of such a law". So says one of the illustrations of section 120.1
1. Section 120, Indian Succession Act, 1925, illustration (vii); Section 107 of the Indian Succession Act (10 of 1865), para. (iii).
19.7. Problem arising on second paragraph.-
So much as regards the first paragraph of section 11. We shall now deal with an important question that is raised by the second paragraph of the section. Operating as an exception to the first paragraph, the second paragraph saves conditions in a lease which are inserted "for the benefit of the lessor or those claiming under him".
It is well-known that conditions are often inserted in leases, prohibiting or restricting the lessee from assigning the lease or subletting the leased premises. While in the absence of such a condition, the assignment or sub-lease would be permissible under the Act1, that position is expressly made subject to a contrary provision in the lease.2 Now, when such a condition is expressly inserted in a lease, the question arises whether it is to be construed as one intended for "the benefit of the lessor" within the meaning of the second paragraph of section 12.
At first sight, it would appear that3 the answer should be in the affirmative and that there can hardly be any doubt on the subject. It would appear, however, that a Calcutta case throws some doubt on the subject.4 Though the observations in that case were, strictly speaking, obiter, they have, with great respect, created some confusion.
. Section 108(j).
2. Section 108, opening lines.
3. See para. 19.29, (infra).
4. Nilmadhab v. Naruttam, ILR 17 Cal 627 (See infra).
19.8. Effect of covenant on validity of assignment.-
Even if the point just now mentioned is kept aside, there yet remains to be considered another point also arising out of the second paragraph on the same subject. If such covenants against assignment of a lease are violated, and an assignment or a sub-lease is made in violation thereof, is the assignment or sub-lease ineffective? In other words, assuming that a condition prohibiting an assignment or sub-lease is one for the benefit of the lessor and therefore not invalidated by section 12, does it so operate as to render the assignment or sub-lease void?
One would have thought, that to this question also, the answer should be in the affirmative. But it would appear from the reported decisions, to be discussed presently, that while one view on the subject is that the assignment is void, another view would merely recognise a right to damages in favour of the lessor for breach of the covenant, at the same time treating the assignment as valid notwithstanding that it is in violation of an express covenant.
19.9. Aspect of power of re-entry.-
At this stage, it is also necessary to refer to the law relating to forfeiture of leases. Under the Act,1 the mere fact that the lessee commits breach of a covenant of the lease does not, in general, suffice to confer a right on the lessor to forfeit the lease. It is further required in general that the covenant should state that the lessor has a power to re-enter the premises for breach. This restriction seems to have been inserted in view of the hardship that may be caused to the lessee by a forfeiture. This general rule applies to covenants against assignments, as well as to other covenants.
The scope of this rule is restricted to cases where the lessor proposes to forfeit the lease. It has in the scheme of the Act, no express relevance to-(i) the question whether the covenant in valid as between the lessor and the lessee, or (ii) whether the covenant is to be regarded as for the benefit of the lessor, or (iii) whether action taken in breach of the covenant would be legally recognised and what, if any, would be the legal remedies for the breach-leaving aside forfeiture, for which, as already stated, the covenant must contain an express power of re-entry.
Now, what has happened is that the requirement that there should be a power of re-entry, which, according to the scheme of the Act, is relevant only in the context of a claim to forfeit the lease2, has somehow been considered to be relevant also for deciding the other queries listed in the immediately preceding discussion. The view is sometimes taken-expressly or impliedly, that where there is no power of re-entry, then an assignment in breach of a covenant to assign is valid, qua assignment, though the lessor can sue the lessee for damages. This view has been taken in a later Calcutta case3, holding that an assignment in breach of such a covenant is nevertheless valid. There is no elaborate discussion of the various aspects.
1. Section 111 (5), para. 19.13, infra.
2. Para. 19.9, supra.
3. Basarat All Khan v. Manirullaa, ILR 26 Cal 745 (746).
19.10. Three shades of view.- Thus, case law reveals three shades of opinion-
(i) the covenant is void;
(ii) the covenant is valid, but the assignment is also valid even though in breach of the covenant;
(iii) the assignment is void.