Decided on March 04,1946


Referred Judgements :-


Cited Judgements :-



Lokur, J. - (1.)THIS is an appeal by the receiver of the estate of the insolvent Bhiku Appa Kura against the order of remand passed by the Assistant Judge of Sholapur under the following circumstances, Bhiku sold his shop to the respondent Dattatraya for Rs. 12,000 on December 15, 1930. The consideration was made up of Rs. 5,000 due as past debts after certain remission, and Rs, 7,000 paid in cash at the time of the execution of the sale deed. Within a week after the execution of the sale deed, an application for insolvency was made on December 23, 1930, and Bhiku was adjudged insolvent on June 27, 1931 The receiver of his estate made an application, under Sections 53 and 54 of the Provincial Insolvency Act to have the sale set aside on the ground that it was fraudulent and intended to give preference to the respondent. The sale was set aside on March 26, 1934, and the order was confirmed in appeal on August 5, 1935. The second appeal to the High Court was dismissed. Thereafter on August 28, 1939, the respondent made an application to have his name entered in the schedule of creditors for a sum of Rs. 15,355-10-6 out of which he claimed Rs. 7,000 as a charge on the insolvent's property. The receiver contended that the sale deed taken by the respondent was colourable and sham and without consideration, that the respondent's claim for Rs. 5,000 was time-barred and that as it had been held in the previous appeal that the amount of Rs. 7,000 had not been paid in cash, his claim for that amount was barred as res judicata. He also contended that as the amounts had been paid for obtaining a fraudulent sale deed the respondent was not entitled to be entered in the schedule of creditors. The Insolvency Court upheld these contentions and rejected the respondent's application. In appeal the learned Assistant Judge held that as the sale was voidable and was set aside at the instance of the receiver, the respondent was entitled to recover back his amounts under Section 65 of the Indian Contract Act. He, therefore, remanded the proceedings to the trial Court with a direction to allow the respondent to prove his claim in respect of both the past debt and the cash amount included as consideration in the sale deed. The receiver has presented this appeal against that order of remand, and it is contended that the plaintiff's claim cannot be recognised by the receiver either in respect of the cash amount of Rs. 7,000 or in respect of the amount of the past debt included in the consideration of the sale deed.
(2.)THE contention in the lower Court that the respondent should not be allowed to prove whether he had actually paid Rs. 7,000 in cash in view of the finding in the previous litigation is not pressed, since although it was then held that the amount of Rs. 7,000 was not proved to have been paid in cash, yet ultimately the case was decided on the ground of fraudulent preference. It was not then necessary to decide finally whether the consideration was paid in cash or not, and the finding does not operate as res judicata. .
We have to consider the right of the respondent with regard to the two items from different points of view. Rs. 5,000 which formed a part of the consideration of the sale deed was antecedent debt due on two promissory notes. It is recited in the sale deed that out of the amount due on the promissory notes some amount was remitted and the balance of Rs. 5,000 only was taken into account. This debt was in existence before the sale deed and cannot be said to have been tainted with any fraud, whereas, the amount of Rs. 7,000 was paid by the respondent in furtherance of a fraud. As held in Mai Chand v. Ram Jas [1939] A. I. R. Lah. 145 cash items of consideration in a transfer set aside by the Insolvency Court advanced at the time of the execution of a fraudulent transfer cannot be allowed to be proved as a debt, as it is advanced for the purpose of carrying out the fraud. But the learned Assistant Judge has allowed proof of that payment under Section 65 of the Indian Contract Act. That section provides that when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.

It is argued that in the present ease the sale was voidable at the instance of the receiver and it became void only when the receiver chose to have it annulled and therefore the purchaser who is deprived of the property purchased by him is entitled to get back the amount which he had paid as consideration for the sale deed. Mr. Kotwal for the respondent has referred to the case of Parasharam v. Sadasheo [1936] A. I. R. Nag. 268, in which it is held that where a transaction is set aside under Section 53 of the Transfer of Property Act, the transferee is entitled to the return of the sale price, but is not entitled to the costs of defending a suit against the transferor's creditors. Commenting on this decision on p. 350 of his Indian Contract Act, (seventh edition), Sir Dinshah Mulla says in the footnote that it appeared from the report that the transferee was a party to the fraud of defeating and delaying creditors and that if so, he was not entitled to any relief. A similar observation is to be found in various decisions, like Radragowda v. Gangowda (1937) 39 Bom. L. R. 1124. Obviously Section 65 does not apply to agreements which are void ah initio, and still less to those which, are tainted with fraud or other moral turpitude, and there is no section in the Act under which money paid for an unlawful purpose may be recovered back.

(3.)THERE is a distinction between setting aside a transfer under Section 53 of the Transfer of Property Act and setting aside a transfer under Section 54 of the Provincial Insolvency Act. In the former case the transfer is voidable and can be avoided at the instance of a creditor if it is proved to have been intended to defeat or delay the creditor, whereas in the latter case, if an application for insolvency is made within three months after the transfer, such transfer is void, if it is intended to defeat or delay the creditor, and not merely voidable, and as soon as it comes to the notice of the receiver it shall be annulled. Hence a transfer under such circumstances cannot be said to be discovered to be void or said to become void within the meaning of Section 65 of the Indian Contract Act. I, therefore, hold that so far as Rs. 7,000 paid in cash at the time of the execution of the sale deed are concerned, the respondent cannot prove his debt and cannot seek to have his name entered for that amount in the schedule of creditors.
The case of the amount of past debt stands on a different footing. There is no allegation that the antecedent debt mentioned in the sale deed was tainted, and when that debt was advanced there was no idea of committing; any fraud on the other creditors. Where an alienation effected by an insolvent is set aside on the ground of fraudulent preference, it is open to the alienee to prove as an unsecured creditor his just antecedent debts which were in existence before the fraudulent transfer was thought of but which were fraudulently included in the consideration for that transfer. In Myers, In re. Myers', Ex parte [1908] 1 K. B. 941 it was held that a creditor could not prove in bankruptcy for money paid by him to the insolvent in the course of carrying out a transaction devised in fraud of the general body of creditors. But as pointed out by Le Rossignol J. in Devi Dial v. Sunder Das [1919] A. I. R. Lah. 211 that that decision was based upon the principle that no Court would grant relief, which reposed on a fraudulent transaction, but as the antecedent debt was not advanced for the purpose of any fraudulent transaction, the mere fact that it was included as consideration for a subsequent fraudulent transaction cannot debar the applicant from claiming to prove that debt and be recognised as an unsecured creditor to that extent. The Madras High Court also has taken a similar view in Ramaswami Aiyangar v. Official Receiver [1926] A. I. R. Mad. 672 and I respectfully agree with it.


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