- (1.) This appeal by special leave is directed against the concurrent orders of the Courts below allowing the Official Receiver's application under S. 35 of Travancore Regulation viii of 1090 (=1915), to which we shall, refer in the course of this judgment as the Insolvency Regulation, for annulling the usufructuary mortgage (EX. I) for Rs. 75,000 dated 18-8-1924, executed by a number of persons who may not be conveniently described as the insolvents. The main question for determination in this appeal on behalf of the transferee is whether the transaction in his favour is within the third exception to S. 35 aforesaid. (In this judgment we shall use the dates with reference to the Gregorian Calendar equivalent to the dates maintained under the Malayalam Calendar).
(2.) In order to appreciate the arguments in this appeal it is necessary to state the following facts. Koya Kunju was a flourishing merchant at Quilon carrying on trade in piecegoods, yarn, provisions, etc. He died in or about the year 1921 leaving him surviving his widow, two sons and two daughters, who jointly carried on the ancestral business through the eldest son under a power-of-attorney. They added to the family business a tile factory and an oil mill. In June July 1924 the sons approached the appellant's father, who was a flourishing moneylender living about fifty to sixty miles away from Quilon at a place called Mankompu. He agreed to advance the sum of Rs. 75,000 on the usufructuary mortgage of certain immovable properties in and near Quilon belonging to the family, for the purpose of carrying on their trade and business after his two sons had made certain enquiries at quilon about the status and means of the borrowers and whether the transaction would be worth their while. After a draft had been made at the instance of the creditor, the mortgage bond and a lease deed granting a lease of the mortgaged properties to the mortgagors themselves bearing the same date, namely, 18-8-1924, were executed and registered by the heirs aforesaid of Koya Kunju. The purpose of the loan is stated in the document to be the family necessity, namely, carrying on trade, etc. In lieu of interest on the Rs. 75,000 advanced at the rate of nine percent, per annum for a period of three years the mortgaged properties, namely, buildings, fields and cocoanut orchards etc., were said to have been delivered to the mortgagee who in his turn granted a lease back to the mortgagors on payment of a stated sum by way of annual rents, viz., Rs. 6,750, equivalent to interest at nine per cent. on the principal sum advanced. It was also stipulated in the lease deed that if rent was in arrears for two years, the lessees would surrender the properties to the lessor and accrued arrears of rent also would be a charge on those properties. It is common ground that the mortgaged properties were unencumbered at the date of the transaction, but soon after a hypothecation deed in favour of a third party named Kadir Moideen Rowther was executed on 30-8-1924, for the sum of Rs. 78,859-15-0, hypothecating the equity of redemption in respect of the properties mortgaged to the appellant and certain other properties. The second bond which will hereinafter be called the hypothecation bond, to distinguish it from the usufructuary mortgage bond in question, was admittedly executed to liquidate the out, standing debts due to the hypothecatee himself in respect of dealings in cloth, yarn and iron goods between the parties to that transaction. It appears that those two parties were having dealings in those commodities from about the year 1911. Hence they were very well known to each other on account of their business dealings, whereas the mortgagee in respect of the usufructuary mortgage bond in question was a complete stranger to the family of the mortgagors. On 15-9-1924 one of the business creditors of the family of the mortgagors, S. M. Sheikh Mohideen Rowther, made an application in the District Court of Quilon for adjudicating them as insolvents. He impleaded the mortgagors, the five heirs aforesaid of Koya Kunju. Amongst the acts of insolvency were mentioned the transactions between the insolvents and the appellant and the hypothecation bond aforesaid. In his affidavit in answer, the first counter petitioner for himself and as agent of the other members of the family admitted their joint trading business and the debts incurred by his firm. He also admitted the debts due under the usufructuary mortgage bond in question and the hypothecation bond aforesaid and ended by saying that the debts of the counter petitioners including the debts covered by the said usufructuary mortgage bond and the hypothecation bond amounted to two and a half lakhs of rupees and that their assets were worth not less than seven lakhs of rupees. He denied that they had committed any acts of insolvency or had done anything to delay or defeat their creditors and expressed their readiness to pay the debts due to the petitioning creditor. A number of other creditors also made similar applications for adjudicating the mortgagors as insolvents. All those proceedings appear to have been consolidated and the District Judge by his order dated 29-8-1927, adjudged the counter petitioners insolvents. About the contents and effect of this order of adjudication something more will have to be said in the course of this judgment while dealing with the most important question of law raised by the learned counsel for the Official Receiver. By his order dated 19-10-1924, the District Judge appointed the Official Receiver as the interim receiver in respect of the insolvent's properties to take immediate possession thereof. The interim receiver, Sri V. N. Narayana Pillai, made a report to the court on 11-2-1925, stating inter alia that the total yield of the properties mortgaged to the appellant could be estimated at Rs. 1,600 per year and that the insolvents were not prepared to continue in possession of the mortgaged property at a rent of Rs. 6,750 as stipulated in the lease deed aforesaid; and that therefore the mortgaged property was not expected to fetch an income equivalent to nine per cent. on the mortgage bonds as stipulated. The rent having fallen in arrears over two years, the mortgagee instituted a suit against the mortgagors, impleading the Official Receiver also for recovery of arrears of rent with interest, as also for recovery of possession of the mortgaged property; and the suit appears to have been decreed, for the reliefs prayed for. Since then the mortgagee appears to have been in direct possession of the property. It does not appear that in that suit any question as to the want of consideration or of bona fides of the mortgage bond was raised either by the mortgagors themselves or by the Official Receiver.
(3.) It was on 28th March 1928, that the Official Receiver made his application to the Court praying "that the Court may be pleased to declare the transfers described in sch. A, void as against your petitioner." Schedule A comprised the usufructuary mortgage bond aforesaid and the lease deed, as also the hypothecation bond for Rs. 78,859-15-0. It is remarkable that no allegations of fact bearing on the bona fides of the transactions impeached are made in respect of the mortgage bond in question. After stating the insolvency proceedings and the fact of the execution of the deeds in Sch. A and that the insolvency petition on which the order of adjudication was passed had been filed in Court within two years after the dates of transfer, the only relevant statement made in the petition is para 4 to the following effect: "That the said transfers are void as against your petitioner under Ss. 35 and 36 of the Insolvency Regulation." This petition of the Official Receiver was opposed by the mortgagee's son, N. Krishna Iyer on his father's behalf, chiefly on the ground that the mortgage was a bona fide transaction for valuable consideration which was not affected by the Insolvency Regulation, that there was a misjoinder of parties and causes of action, apparently objecting to the Receiver filing a single petition in respect of the usufructuary mortgage deed and the hypothecation bond; and that it was barred by limitation and estoppel. A number of issues were raised on 24thy July 1929, the most important of them being the first issue to the following effect : "Whether the otti and lease deeds impeached by the Receiver were executed in good faith and for valuable consideration - Other issues related to the formal issues in bar of the proceedings. Before the learned District Judge (Mrs. Anna Chandy) a preliminary objection was raised on behalf of the Receiver to the effect that in view of the decision of the Judicial Committee of the Privy Council in Mahomed Siddique Yousuf v. Official Assignee of Calcutta, 70 Ind App 93: (A I R 1943 P C 130) (A) the matter was res judicata between the parties and the order of adjudication could be questioned only by an appeal against it, which had not been done. The learned Judge gave effect to that objection and held that the transferee was precluded from agitating the matter and that his only remedy was by way of appeal against the order of adjudication. This point has been very prominently raised by the learned counsel for the respondent, the Official Receiver, at the forefront of his arguments and will have to be dealt with at the proper place. The learned Judge held on the merits that Ex. I, the usufructuary mortgage bond, was not for the full consideration stated in the deed but that only Rs. 20,000 had been paid to the mortgagors and that in any event the transaction did not represent a bona fide transfer. As the hypothecation bond is not the subject-matter of this appeal, it is no more necessary to follow the course of the proceedings in respect of that transaction. The Receiver's application was therefore allowed both on the ground of incompetency of the transferee to challenge the adjudication order and on the finding that it was a 'fraudulent transfer". On appeal by the mortgagee, the learned Judges of the High Court disagreed with the trial Judge and held that the decision in 70 Ind App 93: ( A I R 1943 P C 130) (A) could not stand in the way of the appellant and that the entire consideration of Rs. 75,000 had been proved to have been paid to the mortgagors but agreed with the trial Judge in holding that the transaction was not made in good faith in the sense that it had not been entered into with due care and attention. In the result the appeal was dismissed. The transferee prayed for a certificate of fitness to appeal to this Court, but the High Court refused that application. The appellant then moved this Court and obtained special leave to appeal.;