BHAGWAN DAS AND COMPANY Vs. CHUTTAN LAL

JUDGEMENT

(1.) This is BD appeal from an order of the District Judge, sitting in insolvency, declaring invalid a transaction by which the insolvent transferred to one Bhagwan Das, a b inker, his interest in a payment warrant due to the insolvent from the Divisional Disbursing Officer, for the month of June, in respect of the transport services rendered by motor cars by the insolvent. The transaction has been declared invalid as a fraudulent preference under Section 54 of the Provincial Insolvency Act. The only point decided by the District Judge was whether a new creditor, who only became a creditor in respect of the transaction which gave rise to the question as to whether it was a fraudulent preference, can be a creditor within the meaning of Section 54. We agree with the District Judge that he could be a creditor within the meaning of that section, as for example, where a transaction consists of two independent parts, firstly, the consideration passing to the debtor, thereby creating a debt from the debtor to the creditor, and the second part where the debtor independently and voluntarily makes a transfer in respect of the debt. We think, however, that it is not possible to take that view of the facts in this ease, because our view is that the transaction which resulted in this transfer was one complete transaction in itself; but the case raises other questions which are not considered in the judgment under appeal and the real question before us is whether this transaction under the circumstances of the case was a fraudulent preference, or if not, whether it is protected by Section 55 which protects bond fide transactions with the debtor in spite of impending insolvency. It is quite clear that in the early part of the year in question, namely 1919, the insolvent Rodwell, who had been carrying on this transport business under the name of Smith Rodwell and Company, had got into serious difficulties. His debts were ultimately estimated at something like a lakh and some thousand rupees. He came into contact with one Chuttan Lal, the present respondent, and a creditor in the insolvency, who seeks to upset this transaction, and the result of that association was an agreement under which, in substance, Chuttan Lal became the proprietor of the business. The relevant facts relating to the arrangement between Chuttan Lal and insolvents are set out in a very clear and able report by the receiver in the insolvency, dated the 28 of February, 1920, the result of which is that, according to the view of the official receiver, Chuttan Lal was independently running the transport business from about the end of May, 1919. Chuttan Lal and the insolvents have been elsewhere described as partners, but we do not think it necessary to express any opinion as to the precise legal relationship created by the agreement between them, the relevant fact for this purpose being. that, whether Chuttan Lal was the sole proprietor, as the receiver seems to think, or the dominant partner, he allowed the business to be continued just as it was before, so that members of the general public who were not acquainted with the domestic arrangements of the business, and who did business with the firm, would suppose that Rodwell was in fact the true owner. In other words, the result of the arrangement was that Chuttan Lal, although himself the owner, held out Rodwell as being still the owner of the business and of the cars, The result was that though as between Chuttan Lal and Rodwell the earnings of the business in the month of June, which is the material month in this case, belonged, as the receiver properly reported, to Chuttan Lal, the document under which Smith Rodwell and Co. were entitled to claim payment from the Divisional Disbursing Officer was in the name of Smith Rodwell alias Rodwell, so as to make him the legal owner thereof as regards the debtor and the person entitled to claim payment. It is obvious that, armed with this warrant, Rodwell was in a position to make arrangements for his own benefit behind the back of Chuttan Lal. Rodwell in fact petitioned to be made insolvent on the 1 of September and was adjudicated insolvent on the 22nd of November, He approached the present appellants, who describe themselves as bankers (Bhagwan Das and Company, Bankers of Dehra Dun), and obtained in July at any rate the promise of a loan of Rs. 2,500. At that date the amount due from the Divisional Disbursing Officer to the business of Smith Rodwell & Co. for the month of June was Rs. 5,401 and a document was filled up and signed by the parties on the 22 July, providing for a cash loan. It appears, however, from what took place between the 32 July, and the 24 of July, on which date the cash was actually handed over to Rodwell, that Messrs. Bhagwan Das & Co. were not prepared to make a loan to Rodwell at all unless they could obtain for themselves some security. Telegrams passed between the D.D.O. and Bodwell, namely, a telegram from Rodwell on the 22nd of July, the date that Messrs. Bhagwan Das & Co. expressed their willingness to make the loan, requesting the D.D.O. to make payment to Bhagwan Das, and a reply from the D.D.O. to Rodwell, dated the 24 of July, the date of the actual cash advance, stating that there was no objection. Under these circumstances the only possible inference to be drawn is that unless the Disbursing Officer had consented to the security which Ridwell was prepared to make, namely, an assignment of the debt due under the payment warrant, to Bhagwan Das to secure the loan of Rs. 2,500 the loan would never have been made at all and Messrs Bhagwan Das and Co. would never have become creditors. This is the transaction which is assailed by Chuttan Lal and which the learned Judge has held to be a fraudulent preference. It should be observed that the official receiver seems to have performed his duty in a proper way in investigating this matter, and he reported in favour of the transaction which appeared to him to be a bond fide one. Now, the section provides that every transfer made by a person unable to pay his debts who is adjudged insolvent within three months after the transfer shall be deemed fraudulent and void if made by him "with a view to giving a creditor a preference over the other creditors." The ordinary inference to be drawn from the transaction which we have just recited is fairly clear. So far from intending to prefer Bhagwan Das at the time that he made this transfer of the payment warrant, the dominant motive or object which must have influenced Mr. Rodwell was the desire to possess himself of the cash which Bhagwan Das was ready to advance, and inasmuch as it is clear that Bhagwan Das and Co. would not have made the advance without the transfer of the payment warrant, it is impossible to say that the object of Rodwell was to prefer them or to confer any benefit on them, but rather to acquire the benefit for himself in the shape of cash. Having regard to the importance of the courts of insolvency investigating all such transactions and satisfying themselves that they do not in fact offend against the insolvency law, we have taken the trouble to examine the history of this section which has been adopted from the English Law. The actual language of the section is taken verbatim from the English Bankruptcy Acts and has been unaltered since the year 1869 down to the present date. The case before us is very like the case which was decided under the same section, Ex parte Hodgkin (1875) L.R. 20 Eq. Ca. 746 where a similar transaction was held not to offend against the section. The leading case on the subject in England is reported in New, Prance and Garrard's Trustee V/s. Hunting (1897) 2 Q.B. 19, affirmed in the House of Lords under the name Sharp V/s. Jackson (1899) A.C. 419. In delivering judgment in the Court of Appeal in that case the Master of the Rolls used this language: "The question is whether in fact he has the intention to prefer certain creditors. It has been argued that the debtor must be taken to have intended the natural consequences of his act. I do not think that is true for this purpose. I think one must find out what he really did intend. It appears to me obvious that he was not actuated by any feeling of bounty towards those in whose favour the deed was made, he was doing what he did for his own benefit."

(2.) That dictum was approved by the Lord Chancellor in the House of Lords, and Lord Macnaghten used this expression in the course of his judgment: "I doubt whether the debtor had any intention of preferring creditors think he only regarded himself. If he regarded the creditors at all it was only with a very secondary view."

(3.) Those authorities compel us to hold that this transaction cannot be treated as having been a fraudulent preference under Section 54.