(1.) THIS appeal which was filed in the Malabar Year 1120 was heard and disposed of by a Full Bench of the erstwhile High Court of travancore in 1123. But there was a subsequent application for review which was allowed, and so the appeal has again come up before us for re-hearing and fresh disposal.
(2.) DEFENDANT is the appellant. He had two brothers, Kadir pillai and Makkar Pillai. Kadir Pillai had a son named Pariyathu Pillai. Both of them are now dead, the son predeceased the father. Plaintiffs 1 to 4 are pariyathu Pillai's children. They were minors at the time of the death of both pariyathu Pillai and Kadir Pillai, and by a will executed by Kadir Pillai, makkar Pillai was appointed their guardian. Pariyathu Pillai and the defendant were partners in a business which was dissolved after Pariyathu Pillai's death by Ext. A. At the time of the dissolution it was found that Pariyathu Pillai's heirs had to get a sum of Rs. 40000 from the defendant. It is provided by Ext. A that the defendant should pay Rs. 30000 out of this amount to the plaintiffs with interest at six per cent per annum and that the balance should be paid to pariyathu Pillai's other heirs. In 1113 certain creditors of the defendant filed two Insolvency Petitions to adjudicate him as an insolvent. But before any order of adjudication was passed in those Petitions, the petitioners applied to withdraw them on account of a compromise entered into between the defendant and his creditors, and acting on the petition for withdrawal the court also dismissed the Insolvency Petitions. Makkar Pillai as the plaintiff's guardian agreed to this compromise on their behalf. Under the compromise the plaintiffs were to get only Rs. 15000 in full discharge of the amount due to them from the defendant, and for this amount and for amounts which were due from the defendant to Makkar Pillai, the defendant executed a hypothecation bond, Ext. H, in favour of Makkar Pillai and the plaintiffs. The plaintiffs admit that they have received their share of the amount under Ext. H, i. e. , Rs. 15000. Treating the compromise referred to above as not binding on them and claiming that they are entitled to recover the full amount of Rs. 30000 due to them under Ext. A less the amount realised by them through the execution of ext. H, the plaintiffs brought the suit which has given rise to this appeal for recovery of the balance amount due to them and interest thereon. Their case as stated in paragraph 8 of the plaint is that the compromise was highly prejudicial to their interest since the full amount due to them under Ext. A could have been easily realised from the defendant, that Makkar Pillai agreed to this compromise partly because of his affection for his brother, the defendant, and partly because the defendant won him over, and that the compromise is not therefore, binding on them. The defendant contested the suit. His principal contentions were that the compromise was binding on the plaintiffs as Makkar Pillai was competent to enter into it on their behalf as their guardian and Makkar Pillai had acted in good faith and with reasonable prudence and care, and that the allegation in the plaint that Makkar Pillai had acted against the plaintiffs' interest and was helping the defendant is false. The lower court held that the compromise was not binding on the minors as the amount could have been easily realised from the defendant and as Makkar Pillai was acting against the interest of the minors and in furtherance of his own interest and that of the defendant. Consequently it decreed the plaintiffs' suit with costs subject to certain reduction in the matter of interest; and this appeal is against that decree.
Two points were pressed on behalf of the appellant at the time of hearing. They were (i) that as the insolvency court had given leave to withdraw the insolvency Petitions and dismissed the same acting on the strength of the compromise, the order giving leave to withdraw constitutes res judicata as regards the question whether the compromise is binding on the minors or not; and (ii) that the compromise is binding on the minors because it was a bona fide settlement of the defendant's debts and Makkar Pillai had acted with reasonable care and prudence in agreeing to it.
It will be convenient to dispose of the second point first. In paragraph 8 of the plaint, the plaintiffs have specifically alleged that in the matter of this compromise the defendant had won over Makkar Pillai to his side, and that in agreeing to the compromise Makkar Pillai had acted against the interest of the plaintiffs because he was won over by the defendant and because of his brotherly affection for the latter. Both these allegations are fully supported by the evidence in the case. It is admitted that Makkar pillai is the defendant's brother. Plaintiffs are only the children of a deceased son of a deceased brother of Makkar Pillai. It is also admitted and it is further seen from Ext. H that the defendant paid in full without any reduction the debt that was due from him to Makkar Pillai. The plaintiffs allege that this payment in full of the debt due to Makkar Pillai was an inducement given to Makkar Pillai to agree to a reduction of the debt due to the plaintiffs. Similarly a debt due to a lawyer, Mr. Subbier, was also paid in full by the defendant. One of the Insolvency Petitions was filed by the travancore National & Quilon Bank, Ltd. , which was ordered to be wound up in 1113. It is seen from Ext. IX which is the petition filed in I. P. No. 1 of 1113 for leave to withdraw the Insolvency Petition that in discharge of the debt due to the Travancore National & Quilon Bank Ltd. the defendant paid rs. 5000 in cash and executed a hypothecation bond in favour of the Bank for the entire balance due to it undertaking to pay the same with interest at six per cent per annum. The debt due to the Bank amounted to over Rs. 75000. It is, therefore, clear that the defendant was able and prepared to pay in full, or make arrangements to pay in full, the debts of such of the creditors as demanded full payment of the debts due to them. Seeing that the debt due to the plaintiffs was only Rs. 30000, it appears to us that he would have paid in full that debt also if only the plaintiffs' guardian had made a firm demand for payment of the debt in full and not agreed to the reduction. That other creditors were paid only eight annas in the rupee and were willing to accept that in full discharge of their debts cannot be accepted, in the circumstances mentioned above, as proof of the bona fides of Makkar Pillai or of the inability of the defendant to pay the plaintiffs' debt in full. He was careful enough to see that his debt was paid in full and was prepared only to agree to a reduction of the debt due to his wards. There is also other good evidence to show that the defendant would have paid the plaintiffs' debt in full if only makkar Pillai had insisted on a full payment of the same. Ext. B is a copy of the affidavit filed in I. P. No. 1 of 1113 on behalf of the defendant by his agent. It is stated in paragraph 2 of that affidavit that the defendant can pay off all his debts in full and that he has movable and immovable properties worth in all seven lakhs of rupees. In paragraph 3 of the affidavit it is stated that his immovable properties alone would be worth rupees five lakhs and there is also a prayer in that paragraph for issuing a commission for valuing the properties. In paragraph 5 it is stated that his debts are trivial in comparison with his assets and that they could be paid off if only a little time is given to him. Ext. C is an affidavit filed in the same case by the defendant himself. He repudiates in that affidavit the petitioners' allegation that he is unable to pay his debts and states that he has assets worth over rupees seven lakhs and that he has also to get a further sum of about Rs. 275000 from his debtors. His total debts according to Ext. C amounted only to rs. 1,46000. Therefore, it can be seen from the sworn statement of the defendant himself that the debt due to the plaintiffs could have been easily realised from him in full at the time of the compromise. Ext. D is another affidavit filed by the defendant himself in I. P. No. 1 of 1113. In that affidavit also there are statements similar to those in Ext. C as regards the extent of the defendant's assets and debts. From paragraph 5 of Ext. D it is seen that even in the insolvency proceedings there was an allegation that the defendant and makkar Pillai were acting in collusion. The defendant denies in paragraph 5 of ext. D that there was no such collusion. This is very significant in connection with the plaintiffs' allegation that the defendant had won over Makkar Pillai and induced the latter to agree to the compromise which was against their interest. In Ext. E also the defendant had made statements similar to those in exts. C and D regarding the extent of his assets and liabilities. Ext. M is a statement filed by the interim Receiver appointed in I. Ps. 1 and 3 of 1113. In that statement the Receiver says that the annual income from the immovable properties belonging to the defendant would be Rs. 6 to 7 thousand and that the amount due to him from his debtors would be over one-and-a half lakhs of rupees. In these circumstances we have absolutely no doubt of the fact that the compromise to accept Rs. 15000 in full discharge of the debt due from the defendant to the plaintiffs was against the plaintiffs' interest and highly prejudicial to them, that in agreeing to the said compromise Makkar Pillai has not acted with the reasonable care and prudence which the guardian of a minor should normally exercise in such matters, and that he must have agreed to it partly because he was won over by the defendant who paid in full the debt due to him and partly because of his brotherly affection for him; and we hold accordingly. It follows that if the question is not concluded by res judicata the compromise is not binding on the plaintiffs and that they are entitled to recover the whole amount due under Ext. A, less what has been realised by them through the execution of Ext. H.
(3.) AS regards the first point, viz. , the question of res judicata, the appellant's counsel places reliance on Ss. 4 and 14 of the travancore Insolvency Act VIII of 1108, corresponding to Ss. 4 and 14 of the indian Provincial Insolvency Act of 1920. S. 14 of the two Acts are similar and provide that no petition, whether presented by a debtor or by a creditor, shall be withdrawn without the leave of the Court. There is a slight difference between S. 4 of the Provincial Insolvency Act and S. 4 of the Travancore insolvency Act. Clause. (1) and (2) of S. 4 of the Provincial Insolvency Act read as follows: "subject to the provisions of this Act, the Court shall have full power to decide all questions whether of title or priority, or of any nature whatsoever, and whether involving matters of law or of fact, which may arise in any case of insolvency coming within the cognizance of the court, or which the Court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property in any such case". "subject to the provisions of this Act and notwithstanding anything contained in any other law for the time being in force, every such decision shall be final and binding for all purposes as between, on the one hand, the debtor and the debtor's estate and, on the other hand, all claimants against him or it and all persons claiming through or under them or any of them". The difference between S. 4 of the Provincial Insolvency act and S. 4 of the Travancore Insolvency Act consists in a proviso to S. 4 (1)which the Travancore Act adds to S. 4 (1 ). That proviso reads: "provided that, unless all the parties agree the power hereby given shall not be exercised for the purpose of adjudicating upon any claim not arising out of the insolvency". For the purpose of this case, the proviso is not very material. The appellant's counsel contends that since the leave of the Court had to be given for the withdrawal of the Insolvency Petitions, the Court must be deemed to have considered whether the compromise was beneficial or not to the minors and would be binding on them in giving leave to withdraw the insolvency Petitions and that therefore on account of S. 4 the order giving leave to withdraw would constitute res judicata so far as that question is concerned. The short answer to this contention is that S. 4 applies only to decisions of questions arising in cases of insolvency and that no case of insolvency can be said to have arisen when the fact of insolvency and the right to maintain the Insolvency Petition is disputed and no order of adjudication has been passed. An Insolvency Petition can be withdrawn under S. 14 only before the order of adjudication is passed. After the order of adjudication an insolvency Petition cannot be withdrawn even with the leave of the Court, for the debtor has become an insolvent by the order of adjudication (see Rameswara dial's commentary on Provincial Insolvency Act 1920,1953 Edition, p. 111 ). Therefore it is only an annulment of the order of adjudication and not a withdrawal of the Insolvency Petition that can be made after the order of adjudication. S. 14 applies only to withdrawals before adjudication. Matters which have to be considered under S. 14 cannot therefore be said to be matters arising in a case of insolvency, and so S. 4 can have no application to them at all. The effect of the withdrawal of a petition is only to relegate the parties to status quo ante, that is to say, the position of the parties would be as if no Insolvency Petition had been filed, and the creditors would be free to enforce their claim against the debtor subject to any discharge effected or lawful agreement made between them after the institution of the Insolvency petition. The compromise in pursuance of which leave for withdrawing the insolvency Petition is granted is entirely different from a composition scheme sanctioned and accepted by the Court after the order of adjudication. The composition scheme sanctioned and accepted by the Court after the order of adjudication bears the authority of the Court and is a complete answer to all the claims made against the insolvent. The compromise before the order of adjudication in pursuance of which leave is applied for and granted to withdraw the Insolvency Petition does not bear the authority of the Court. It is only a contract or agreement between the parties, and so when such an agreement is sought to be enforced or is pleaded in bar to a creditor's claim, the Court is free to consider its validity and binding nature.
It may also be stated in this connection that the records of the insolvency proceedings produced in this case show that neither the guardian nor any counsel had certified to the Court that the compromise was beneficial to the minors. All that the guardian had certified was that he was the guardian and nothing more. There was no certificate at all from any advocate. Nor had the insolvency Court considered the question whether the compromise was beneficial to the minors. The order on Ext. IX petition was only this: "sanctioned subject to the conditions mentioned herein". In the circumstances, we hold that the order granting leave to withdraw the Insolvency petitions does not constitute res judicata so far as the question whether the compromise was beneficial to the minors and was binding on them is concerned.;