# N. SUBRAMANIA IYER v. THE OFFICIAL RECEIVER, QUILON

- **Citation:** [1958] 1 S.C.R. 257
- **Court:** Supreme Court of India
- **Decided:** 1958
- **Case number:** Civil Appeal No. 165of1953
- **Bench:** Jagannadhadas, B. P. Sinha, Govinda Menon
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/n-subramania-iyer-v-the-official-receiver-quilon-1449
- **Pages:** 27

## Headnote

257
Insolvency-Receiver's application for annulment
of transfer
-Onus-Finding in insolvency proceeding, if res judicata-Good
faith-Test-Travancore
Regulation
VIII of
1090
( = 1915)
s. 35(iii)-Travancore General Clauses Act (II of 1072= 1897), s. 6(2)
-Indian General Clauses Act (X of 1897), s. 2(22).
An usufructuary mortgage in favour of the appellant's
predecessor-in-interest was sought to be annulled by the Official
Receiver as having been executed within two years of the adjudication of the mortgagors as insolvents, under s. 35(iii) of the
Travancore Regulation VIII of 1090 ( ~ 1915) as not having been
entered into in good faith and for valuable consideration. By an
issue framed in the case the burden of proving affirmatively that
the transfer was supported by good faith and valuable consideration was thrown on the transferee. There was also a preliminary
objection by the Receiver that the usufructuary mortgage having
been found to be an act of insolvency in the insolvency proceedings, that finding was res judicata between him and the transferee.
The trial Judge found in favour of the Receiver. On appeal by
the transferee, the High Court affirmed the order of the trial
Judge allowing the Receiver's application for annulment solely on
the ground that the appellant had failed to prove his bona fides
in the sense that he had entered into the transaction without due
care and attention within the meaning of s. 2(6) of the Travancoreand Cochin General Clauses Act.
Held : that the courts below had erred in placing the onus on
the transferee and their orders must be set aside.
It . is the settled law in insolvency proceedings that theburden of proving that a particular transaction is not supported.
by good faith and valuable consideration lies on the Official Receiver
who challenges the transaction.
Official Assignee v. Khoo Saw Cheow, (1931) A.C. 67, Official
Receiver v. P.L.K.M.R.M. Chettyar Firm, (1930) L.R. 58 I.A. 115
and Pope v. Official Assignee, Rangoon, (1933) L.R. 60 I.A. 362,
relied on.
Held further, that there was no scope for the application of
the principle of res judicota in the instant case as the matter that
directly arose for determination in it was whether the impugned.
transaction was not bona fide or for valuable consideration so far
as the transferee was concerned and that was not in issue in the
33
1957
May 24·
1957
N. Subramanja
Iyer
••
r;.. Ojffcia/
Receiver,
Qui/on
258
SUPREME COURT REPORTS
[1958]
insolvency proceedings, nor had he been found in such proceedings to be privy to any act of insolvency intended to defeat
or delay the creditors.
Mahomed Siddique Yous11f v. Official Assignee of Calcutta,
(1943) L.R. 70 I.A. 93, considered.
The crucial question for decision ia
such a
case \vou1d be
\Vhether the transferee was wanting in hon.1 jicies in rc3pxt of the
transfer sought to be annulled and the c,11-rcct test ,·..-ou]d be the
one of honesty as laid down by s. 2(22) of the Indian General
Clauses Act and not that of due care and ~!ttcntion as col)ten1plated
by s. 2(6) of the Travancore and Cochin General Clauses Act.
CIVIL APPELLATE
JURISDICTION : Civil
Appeal
No. 165of1953.
Appeal by special leave from the judgment and
order dated October 3, 1950, of the former Travancore
Cochin High Court in A.S.No. 288 of 1120 (T) ari,ing
out of the judgment and order dated the 3rd Thulum
1120 of the 2nd Judge, District Court Quilon
in
C.M.P. No. 2391 dated 15-8-1103 in I.P. 3/1100.
K.S. Krishnaswamy Iyengar,
Alladi Ku,9puswami
and M. S. K.
Sastri, for the appellant.
N. C. Chatterjee, M. R. Krishna Pillai r:nd Sardar
Bahadur,
for respondent No. 1.
1957, May 24. The Judgment· of the court was
delivered by
Sinha 1.
SINHA J.-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 1690 ( = 1915), to
which we shall refer in the course of this judgment as
the Insolvency Regulation, for annulling the u

## Text

_Characters 0–39,881 of 61,194. This is a partial read: ask again with offset=39881 for what follows._

S.C.R.
SUPREME COURT REPORTS
N. SUBRAMANIA IYER
v.
THE OFFICIAL RECEIVER, QUILON
(JAGANNADHADAS, B. P. SINHA and
GOVINDA MENON JJ.
257
Insolvency-Receiver's application for annulment
of transfer
-Onus-Finding in insolvency proceeding, if res judicata-Good
faith-Test-Travancore
Regulation
VIII of
1090
( = 1915)
s. 35(iii)-Travancore General Clauses Act (II of 1072= 1897), s. 6(2)
-Indian General Clauses Act (X of 1897), s. 2(22).
An usufructuary mortgage in favour of the appellant's
predecessor-in-interest was sought to be annulled by the Official
Receiver as having been executed within two years of the adjudication of the mortgagors as insolvents, under s. 35(iii) of the
Travancore Regulation VIII of 1090 ( ~ 1915) as not having been
entered into in good faith and for valuable consideration. By an
issue framed in the case the burden of proving affirmatively that
the transfer was supported by good faith and valuable consideration was thrown on the transferee. There was also a preliminary
objection by the Receiver that the usufructuary mortgage having
been found to be an act of insolvency in the insolvency proceedings, that finding was res judicata between him and the transferee.
The trial Judge found in favour of the Receiver. On appeal by
the transferee, the High Court affirmed the order of the trial
Judge allowing the Receiver's application for annulment solely on
the ground that the appellant had failed to prove his bona fides
in the sense that he had entered into the transaction without due
care and attention within the meaning of s. 2(6) of the Travancoreand Cochin General Clauses Act.
Held : that the courts below had erred in placing the onus on
the transferee and their orders must be set aside.
It . is the settled law in insolvency proceedings that theburden of proving that a particular transaction is not supported.
by good faith and valuable consideration lies on the Official Receiver
who challenges the transaction.
Official Assignee v. Khoo Saw Cheow, (1931) A.C. 67, Official
Receiver v. P.L.K.M.R.M. Chettyar Firm, (1930) L.R. 58 I.A. 115
and Pope v. Official Assignee, Rangoon, (1933) L.R. 60 I.A. 362,
relied on.
Held further, that there was no scope for the application of
the principle of res judicota in the instant case as the matter that
directly arose for determination in it was whether the impugned.
transaction was not bona fide or for valuable consideration so far
as the transferee was concerned and that was not in issue in the
33
1957
May 24·
1957
N. Subramanja
Iyer
••
r;.. Ojffcia/
Receiver,
Qui/on
258
SUPREME COURT REPORTS
[1958]
insolvency proceedings, nor had he been found in such proceedings to be privy to any act of insolvency intended to defeat
or delay the creditors.
Mahomed Siddique Yous11f v. Official Assignee of Calcutta,
(1943) L.R. 70 I.A. 93, considered.
The crucial question for decision ia
such a
case \vou1d be
\Vhether the transferee was wanting in hon.1 jicies in rc3pxt of the
transfer sought to be annulled and the c,11-rcct test ,·..-ou]d be the
one of honesty as laid down by s. 2(22) of the Indian General
Clauses Act and not that of due care and ~!ttcntion as col)ten1plated
by s. 2(6) of the Travancore and Cochin General Clauses Act.
CIVIL APPELLATE
JURISDICTION : Civil
Appeal
No. 165of1953.
Appeal by special leave from the judgment and
order dated October 3, 1950, of the former Travancore
Cochin High Court in A.S.No. 288 of 1120 (T) ari,ing
out of the judgment and order dated the 3rd Thulum
1120 of the 2nd Judge, District Court Quilon
in
C.M.P. No. 2391 dated 15-8-1103 in I.P. 3/1100.
K.S. Krishnaswamy Iyengar,
Alladi Ku,9puswami
and M. S. K.
Sastri, for the appellant.
N. C. Chatterjee, M. R. Krishna Pillai r:nd Sardar
Bahadur,
for respondent No. 1.
1957, May 24. The Judgment· of the court was
delivered by
Sinha 1.
SINHA J.-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 1690 ( = 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 August 18,
1924, executed by a number of persons who
may
now 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 Malav.alam Calendar).
S.C.R.
SUPREME COURT REPORTS
259
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 piece goods, 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 atlded to the family
business a tile factory and an oil mill. In June-July
1924 the sons approached the appellant's father, who
was flourishing money-lender living about fifty to
sixty mile!j away form 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, August 18,
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 per cent. per
annum for a period of three years the mortgaged prcperties, 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 suni 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
1957
N. Subramanio
Iyer
Y.
The 0 fficial
Receiver,
Qui/on
Sinha J.
1957
N. Subrama11fa
Iyer
v.
The Official
Receiver,
Qui/on
Sinha J.
260
SUPREME COURT REPORTS
[1958]
Rowther was executed on August 30, 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 calJed the hypothecation bond, to distinguish it from the usufructuary
mortgage bond in question, was admittedly executed
to liquidate the outstanding 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 191 l. Hence
they were very well known to each other on account of
their busin;:ss dealings, whereas the mortgagee in
respect of the usufructuary
mortgage bond in
question was a complete stranger to the family of
the mortgagors. On September 15, 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 thaUhe 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
S.C.R.
SUPREME COURT REPORTS
261
consolidated and the District Judge by his orders dated
August 29, 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 orders dated
October 19, 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 February 11, 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 bond 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.
It was on March 28, 1928, that the Official Receiver
made his application to the court praying "that the
court may be pleased to declare the transfers described
in schedule 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 1s remarkable that no
allegations of fact bearing on the bona fides of the
ansactions impeached are m,ade in respect of the mortage bond in question. After stating the insolvency
1957
N. Subramanio
Iyer
v.
The Official
Receiver,
Qui/on
Sinha J.
1957
N. Subramania
Iyer
v.
Th• Official
Receiver,
Qui/on
Sinha J.
•
262
SUPREME COURT REPORTS
[1958)
proceedings and the fact of the execution of the
deeds in schedule 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
donafide transaction for valuable consideration which
was not affected by the Insolvency Regulation, that
there was a misjoinder of parties and causes of action,
apparently ob}~cting 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 July 24, 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 Yousufv.Ojficial Assignee
of Calcutta (') , 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 l;leen very prominently raised
by th~ learned counsel for the respondent, the Official
Receiver at the forefront of his arguments and will
(1) (1943) L. R. 70 I. A. 93.
S.C.R.
SUPREME COURT REPORTS
263
have to be dealt with at the proper place. The learned
1957
Judge held on the merits that Ex. I, the usufructuary N. Subramanlar
mortgage bond, was not for the full consideration
Iyer
stated in the deed but that only. Rs. 20,000 had ·been
The vOfficia/•;
paid to the mortgagors and that in any event the
R(t~ver,
transaction did not represent a bona fide transfer. . As
ui on
the hypothecation bond is not the subject matter of
Sinha k
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 disagreeed with the trial Judge and held that tqe decision
in Mahomed Siddique Yousuf's case (1).could not stand
in the way of the appellant and that the entire consideration of Rs. 75,000 had been proved to have beell'
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 appear
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.
A number of points were raised! on behalf of the
appellant and at the threshold of the arguments it
was contended, and in our opinion rightly, that the·
courts below had erred in throwing the burden on the
transferee of proving affirmatively that the transaction
impeached, namely the usufructuary mortgage bond
dated August 18, 1924, was supported by good faith and,
valuable consideration. The Judicial Committee of
the Privy Council laid it down in the case of Official
Assignee v. Khoo Saw Cheow(2), that upon a true construction of the Bankruptcy Ordinance of the Straits
Settlements, s. 50, sub-s. (3), which in terms is similar to
the provisions of s. 35 of the Insolvency Regulation-,
the onus is upon the Official Assignee to prove that a
conveyance which he was. seeking to set aside was not
(1) (1943) L. R. 70 I. A. 93.
(~)[1931] A. C. 67.
1957
/If. Suhra111ania
Iyer
v.
/he Official
Receh'er,
QuUof/
Si,1ha J.
264
SUPREME COURT REPORTS
(1958)
made in good faith and for valuable consideration.
Jn
that case the trial Judge had ruled that the onus of
proof lay upon the transferee and had set aside the
transaction upon failure of proof led by the transferee.
On appeal it was held that the trial Judge had misdirected himself as to the onus and that as the result
of the misdirection was very serious in that it had
coloured the whole outlook as to the facts and had
substantially prejudiced the appellant's case a retrial
was necessary. The Privy
Council affirmed
I he
decision of the Appeal Court and dismissed the Official
Assignee's appeal, the
respondent-transferee
not
appearing before the Judicial Committee. In the same
year the Judicial Committee followed the aforesaid precedent in the case of Official Receiver v. P.L.K.M.R.M
Chettyar Firm('), which was a case under the Provincial Insolvency Act, 1920. On a consideration of
the provisions of s. 53
of the Act their Lordships
reaffirmed the proposition laid down in the earlier case
of that very year reported in Official Assignee v. Khoo
Saw Cheow(').
Their Lordships examined the terms
of s. 53 and s. 50 of Ordinance No. 44 of the Straits
Settlements dealt with in that•previous decision and
came to the conclusion that they were in substance
the same. The third decision of their Lordships of
the Privy Council to the same effect is reported in
Pope v.Officia/ Assignee Rangoon('). This case went
up in appeal from a decision of the Rangoon High
Court under the provisions of s. 55 of the Presidency
Towns Insolvency Act. In this case their Lordships
observed further that if the transaction impeached
was a real and not fictitious one, the receiver could
not be said to have brought the case within the section
unless he proved that the transferee knew that the
transferor was insolvent at the time the transfer was
made, even though the transfer was of the entire
assets of the transferor.
These
three decisions of
the Judicial Committee settled the law in thi~ country
contrary to what had been the concensus of judicial
opinion previously, that the initial burden of proving
that the transaction impeached had not been made
(<) (1930) L. R. 58 I. A. 115.
(3) (1933) L.R. 6o I.A. 36>.
(>) [1931] .\. c. 67.
S.C.R.
SUPREME COURT REPORTS
265
in good faith and for valuable consideration lies on
the party seeking to set aside the transaction. The
learned counsel for the respondent was not able to
adduce any reasons to the contrary and it must therefore be taken that it is settled
law in insolvency
proceedings that the
burden of proof lies on the
Official Assignee or Receiver who challenges
the
transaction. In this case, as already pointed out,
the issue framed in terms laid the burden of proof
on the transferee, the appellant. He led the evidence
recording of which began on November 21, 1930, and
the evidence of his witnesses, C. P. Ws. 1 to 7 was
recorded between November 21, 1930and November 20,
1932, on different
dates. C.P.Ws.,
8 one of the
insolvents, appears to have been examined in the
interest of the second mortgagee, that is to say, in
support of the hypothecation bond. He was, crossexamined on behalf of the petitioning creditor, as
also of the appellant. He was examined and crossexamined in February and March 1933. It was then
for the first time that it was alleged on behalf of the
mortgagors that only Rs. 20,000 out of Rs. 75,000
secured under the mortgage in question had actually
been paid and that the remaining Rs. 55,000 had so far
remained unpaid. More will have to be said about this
aspect of the case later. C.P.W. 10, one of the other
mortgagors was examined on the same lines as his
brother, C.P.W. 8. C.P.W. 12 is the younger ·brother
ofS.K. Kadir Moideen Rowther, the second mortgagee,
who had taken the hypothecation bond.
He was
examined on October 9, 1935. Curiously enough,
nothing appears to have happened until the first Official
Receiver, V.N. Narayana Pillai, aged 64 years, was
examined as C.P.W. 13 on November 29, 1943. It was
he who had started the annulment proceedings in respect
of the mortgage bond in question. His evidence and
conduct of the proceedings wjll have to be dealt with
presently. We have pointed out the extremely dilatory
way in which the proceedings in the Insolvency Court
were conducted.
The annulment proceedings commenced in 1928 and were determined by the Court of
first instance by its orders dated October 19, 1944.
34
1957
N. Subramanw
Iyer
v.
The Official
Receiver,
Qui/on
S1i1ha J.
1957
1V. Subra1na11ia
Iyer
v.
The Official
ReceiYer,
Qui/011
Sinha J.
266
SUPREME COURT REPORTS
[19581
For a period of more than sixteen years of annulment
proceedings were kept hanging. For whose benefit it
does not appear.
We would fain believe that this
extremely dilatory way of dealing with litigation involving the business community is not a habit in
that part of the country and that the present case is
only an exception. On appeal the High Court has
noticed
the
delay
but
without
any
apparent
disapproval. We have not been able to discover any
reasons, valid or otherwise for this callous disregard
of public time and litigants' interest.
Realising that the annulment proceedings had taken
a dubious course on an issue wtongly throwing the
onus of proof on the transferee, the learned counsel for
the Receiver sought to support the order annulling the
encumbrance on the short ground that the matter was
res judicata between the Receiver and the incumbrancer
on the authority of the decision of the Privy Council
in lv/ahomed Siddique Yousuf v. Official Assignee of
Calcutta(') That
was an appeal from the Calcutta
High Court in a case arising under the Presidency
Towns Insolvency Act, III of 1909.
In that case the
Judicial Committee, following the well established rule
in England as laid down in the leading case of Ex parte
Learoyd ln re Foulds ('), has held that the order of
adjudication based on the allegation that one of the
several acts of insolvency was the impugned transfer
was conclusive against the transferee in subsequent
proceedings taken by the Official Assignee to set aside
the transfer by virtue of s. 116 sub-s.(') of the Presidency
Towns
Insolvency
Act, 1909.
Their
Lordships
have pointed out in the course of their judgment that
the provisions of the Presidency Towns J nsolvency Act
then before their Lordships were in terms similar to
those of the Bankruptcy Act of 1869 which had been
repeated in the subsequent Acts of 1883 and 1914.
They also point out that it is rather anomalous that
the decision should adversely affect a party who was
not before tiie court when the adjudication order was
made. But they held that the words of the statute
and the requirements of public policy in relation to
(1) (1943) L.R. 70, I.A. 93.
(,) (1878) io Ch. D. 3.
S.C.R.
SUPREME COURT REPORTS
267
adjudication proceedings were enough to outweigh any
t957
considerations of hardship to individuals. On this N. subr;;;;;;;nia
view they affirmed the decision of the Calcutta High
Iyer
Court and overruled that of the Madras High Court in
The ~fficial
Official Assignee of Madras v. O.R.M.O.R.S. Firm(1).
Receiver,
1.
l
d
Qui/on
Naturally very strong re iance was p ace by the learned
counsel
for the
respondent
Receiver
on
that
Sinha J.
case. It was argued that as the order of adjudication
dated August 29, 1927, had with reference to the
transaction in question, amongst others, held that the
debtors had committed acts of insolvency by executing
the deed (Ex. I) with a view to defeat or delay their
creditors, it was no more an open controversy and the
findings then recorded were conclusive in the present
proceedings. There are, in our opinion, insunnountable difficulties in the way of the respondents on this
aspect of the case.
It was stated by the petitioning
creditors that the counter petitioners (insolvents) had
executed the usufructuary mortgage bond in question
and the hypothecation deed in respect of almost all
their properties with a view to defeat or delay the
other creditors. Issue 5 was raised in these terms :
"Have the defendants committed acts of insolvency as alleged in the petition?"
and the findings of the court was that those were acts
of insolvency "with intent. to defeat or delay their
creditors". It is said that these findings ·are res judicata
between the Receiver and the appellant. Even so,
there is no finding that the transferee was privy to
such acts. It was not necessary to find at that stage,
and it had not in terms been found, that the transaction impugned in this case was ilot bona fide so far as
the transferee is concerned or without considerationrnatters which directly arise for determination in the -
annulment proceedings leading up to this appeal.
Hence, even assuming that the rule laid down by
their Lordhips of the Judicial Committee in Mahomed
Siddique Yousufv, Official assignee of Calcutta(2) in a
case arising under the Presidency Towns Insolvency
Act, applies to a. case like the present governed by the
Insolvency. Regulation, which follows more closely the
(1) (1926) I.L.R. 50 Mad. 541.
(2) (1943) L.R. 70 I.A. 93.
1957
,\' S11bran111nia
Iyer
v.
The Official
Receiver,
Qui/on
Sinha J.
268
SUPREME COURT REPORTS
[1958]
Provincial Insolvency Act and not the Presidency
Towns Insolvency Act, the present controversy is not
barred by any findings in the order of adjudication. In
this appeal we are concerned with the bona fides of the
transferee.
Nor has it been found that there was
no valuable consideration for the mortgage. Hence,
without pronouncing on the applicability of the decision
aforesaid
of the Judicial Committee it must
be
held that the question under s. 35 is still open.
Having disposed of the preliminary questions raised
on behalf of the parties, we have now to determine the
main question in controversy, namely, whether it has
been proved that the usufructuary mortgage bond
dated August 18, 1924, was not made in good faith and
for valuable consideration. Section 35 of Travancore
Regulation VIII of 1090 = 1915) is in these terms:
"Any transfer of property not being-
(i) a transfer made before, or at, and in consideration of, marriage,
(ii) or a transfer made to, or for, the wife or
children of the transferor of property that has accrued
to the transferor in consideration of the marriage or in
right of his wife.
(iii) or a transfer made in favour of a purchaser or
incumbrancer in good faith and for valuable consideration,
shall, if the transferor is adjudged insolvent within
two years after the date of the transfer, be
void
against the receiver, and may be annulled by the
Court."
This section is equivalent to s. 36 of the Provincial
Insolvency Act (III of 1907) and to s. 53 of the
Provincial Insolvency Act (V of 1920), except for the
addition of the second exception which was apparently
added in the Travancore law to make it in consonance
with local laws relating to devolution of family property, and secondly that the word "void" in the last
clause of the section in the Insolvency Regulation
and in s. 36 of the Provincial Insolvency Act of 1907
has been changed into "voidable" Regulation VIII
of 1915 aforesaid has been replaced by Travancore
S.C.R.
SUPREME COURT REPORTS
269
Regulation VIII of 1108 (1932). Section 53 of the
later has taken the place of s. 35 of the former and
is exactly in the same terms except for the fact that
the word "void" has been changed. into "voidable",
thus bringing the Regulation of 1932 in line with the
Act of 1920.
It is not necessary for the purposes of this case to
go into the question of ·Whether any legal significance
attaches to the change of the word
"void" into
"voidable". The
legislative histroy
of the Jaw
relating to annulment of transfers or incumbrances
made or created, by a person who has since been
declared insolvent, indicated above shows that the law
· in the united State of Travancore and Cochin was the
same as the law in what used to be called British
India.
The question now is, has the Receiver
on
whom the burden of proof lay, as shown above, been
successful in discharging that burden. It has not been
argued before us by the learned counsel for the
Receiver that the courts below were not in error
in discussing the evidence and deciding this controversy on the basis that the burden lay on the
transferee to prove that the trasfer in his favour was.
bona fide and for consideration. If the burden lay on
the transferee, he would have to show not only that
he paid some consideration but tha~ he paid valuable
consideration and that that consideration was paid
bona fide. As to what is the legal import of "bona fide"
will be discussed presently. But we are in this case
proceeding on the law so far settled in this country
after the decisions aforesaid of the Privy Council that
the burden lies on the Receiver. The contrary proposition has not been pressed upon us and we need not
therefore pronounce upon that. If the burden lay on
the Receiver,
in our opinion, his application for
annulment can be allowed on proof either that there
was no consideration for the transaction or that the
consideration was so inadequate as to raise
the
presumption of want of good faith. Alternatively, the
Receiver may also succeed on showing that though
there was valuable consideration for the transaction
impeached, there was want of good faith in the sense
1957
N. Subramania·
Iyer
v.
The Official
Receiver,
Qui/on
Sinha J.
1957
Y. ·Subra111a11ia
Iyer
v.
The Official
Receiver,
Qui/on
Sinha J.
270
SUPREME COURT REPORTS
[1958]
that the transferee knowing all the cirsumstances of
the transferor who had
since been adjudged an
insolvent entered into the transaction with a view to
screening the assets of the insolvent
from
the
Receiver in whom the insolvent's
property
vests
for the benefit of the
creditors. Such
will
be
mostly cases of benami transactions in favour of some
relative of the insolvent or a person in whom he has full
confidence that he will hold it ultimately for the benefit
of the insolvent or persons in whom he may be interested. Or it may be that a person finding himself over head
and ears in debts wishes to convert his assets into liquid
assets with the collusion or connivance of the transferee. In both cases the intention clearly is to shield the
assets against the claims of creditors and in such cases,
though the transfer may have been for consideration,
either adequate or otherwise, but having been entered
into with a view to defraud or delay the creditors,
the transferor and the transferee sharing the common
intention, the transaction must be annulled and the
assets must be brought into the common hotchpot for
the benefit of the insolvent's creditors.
Though the learned District Judge held that only
Rs. 20,000 had been paid by the mortgagee to the insolvents and Rs. 55,000 out of Rs. 75,000, the stated
amount of the mortgage money, had remained unpaid, the High Court had found that the
entire
consideration passed. If this finding is correct, then
the fact that such a large amount had been paid by
the m.ortgagee would take him a long way to success
in proving the bona ft.des of the. transaction. But it
has been argued by the learned counsel for the respondent-Receiver that that finding is not correct. It has
been strenuously argued on behalf of the respondent
that the mortgage bond in question was without consideration. The Official Receiver had also filed a
memorandum of objections in the High Court challenging the correctness of the finding by the learned
District Judge that Rs. 20,00Q had as a matter of fact
been paid to the transferors. As on the question of
consideration the two courts below have materially
differed in their conclusions, the question is open
S.C.R.
SUPREME COURT REPORTS
271
before us. We have therefore, to examine how far
the transaction in question was for valuable consideration. Before advancing this large sum of money the
creditor had deputed his two advocate sons, C.P. W s.1
and 2, to make enquiries into the antecedents of
the persons who had applied for the loan and
as to whether they were financially sound and otherwise desirable persons to deal with. The two young
men who had just entered upon their legal career
went and stayed witl). a relation of theirs who has
been examined as
C.P.W.
6,
Venkitarama Iyer
Ramakrishna Iyer, who was at the relevant dates
posted as Assistant Excise Commissioner at Quilon.
This gentleman being interested in the welfare of the
family of the intending lenders, claim1> to have made
confidential enquiries from respectable merchants at
Quilon and told his two young guests that . the
borrowers were persons of position and good business
reputation and that they had ample unencumbered
properties on the security of which advance up to a
lakh of rupees could be made. The two sons of the
mortgagee having
satisfied
themselves that the
proposed mortgagors were persons of good status in
society and sound financial position reported to their
father who on the strength of the reports by his sons
agreed to lend Rs. 75,000 on a first mortgage of properties reportedly worth more than at least a lakh of
rupees. The mortgagee also examined himself as
C.P.W. 7. The father and the two sons have given
evidence in support of their case that out of the
Rs. 75,000 agreed to be advanced on the mortgage
when: some of the mortgagors went with the registered
document to the mortgagee's place Rs. 55,000 was
paid in cash to them on the basis of the receipt
(Ex. LIV) dated August 20, 1924.
The remaining
Rs. 20,000 according to the evidence was paid later.
Those payments were made in six instalment!! between
September 1, and September 9, 1924, as evidenced by
receipts (Bxs. L VII and L VIII) and endorsements on
letters, Ex&. LIX(a), LXl(a), LXIV(a) and LXV(a). All
these paymets are also supported by the corresponding entries in the books of account regularly kept by
M2SC61-8
19S1
N. Subramania
Iyer
"·
The 0 fficial
Receiver,
Qullon
Sinha/.
1957
N. Subramania
Iyer
v.
The Official
Receiver,
Quilon
Sinha J.
272
SUPREME COURT REPORTS
[1958}
the mortgagee and proved in court as Exs. LXVII to
LXXII series. Of the six instalments paid as aforesaid,
some of them were paid to the mortgagors' creditors
and some of those creditors have been examined.
C.P.W. 4 admits having received Rs. 2,500 and
endorsed receipt of the same, Ex. LIX(a).
C.P.W. 3
similarly speaks of having received Rs. 1,500
and
endorsed receipt of the same, Ex. LXIV(a) and is
corroborated by his accountant, C.P.W. 9 who proves
the ledger and day book, Exs. LXXX and LXXXJ.
Thus we have not only the evidence of the mortgagee
and his relations but also of third parties, creditors of
the insolvents, proving the passing of consideration.
The case does not rest only upon oral testimony. It
is amply corroborated by contemporaneous entries in
books of account maintained by the lender himself
and by third. parties who have been paid by him on
account of the mortgagors. This considerable body of
oral and documentary evidence is supported by the
admissions of the mortgagors, not in the mortgage
bond itself which stand rebutted, but by a series of
admissions of receipt of the entire consideration money
in the several receipts and endorsements made by
some of them. All this voluminous evidence has been
very carefully considered by the learned Chief Justice
at pages 31 to 34 of the judgement of the High Court.
We need not repeat all that has been said by the
High Court for recording the finding that it was constrained to differ from the conclusions of the learned
District Judge and to hold that Ex. I
"is
fully
supported by consideration". As already indicated.
neither the mortgagors themsclve; nor th: Official
Receiver in their pleadings made out a case that the
transaction was unsupported by consideration or that
the consideration paid was not fulJ amount sho•.vn in
the document as having been advanced or that a much
smaller sum like only Rs. 20,000 had been actually
paid. It has been shown above with reference to the
dates of the examination of witnesses that C.P.Ws. I
to 7 had been examined and their evidence recorded
between November 21, 1930; and November 20. 1932.
Until that date it was not even suggested to those
S.C.R.
SUPREME COURT REPORTS
273
witnesses in cross-examination that only Rs. 20,000
had been paid and no more. For the first time on
February 4, 1933, when one of the mortgagors was
examined as C.P.W. 8, it was alleged that only
Rs. 20,000 had been received by the
mortgagors,
which amount they paid to their creditors. C.P.W.
10, the second of the mortgagors, was examined on
June 12, 1933. He does not in any way improve the
Receiver's case that the transaction was without consideration. He does not even say that only Rs. 20,000
out of the consideration stated in the mortgage
bond had been received
by
the
mortgagors.
Lastly, the then Receiver
himself was · examined
as
C.P.W.
13
on November
29,
1943. This
gentleman, who is described in the judgments below as
one of the leading advocates, does not appear to have
taken his duty as a Receiver very seriously. He does
not appear to have examined the insolvents themselves
OF their books of account carefully to find out the
exact financial position of this trading family. He seems
to suggest in his evidence that at the material dates
the Quilon Bank was functioning and that the insolvents
"did not get addttional accommodation in the
said bank or the other hundi shops during 1099"
(1923-24).
These statements, to put it mildly,
are
disingenuous. In the first instance, · they would
suggest that the insolvents had borrowings from the
Quilon Bank or other hundi shops and secondly that
their financial position was so embarrassed that the
said bank or other hundi shops had refused to give
them any further advance of money. As a matter of
fact, it is nobody's case that the insolvents had at any
time any dealings with the Quilon Bank. We know
from the evidence that the insolvents owed to the
Imperial Bank anything between Rs. 30,000
to
Rs. 40,000. Either a portion or the whole of the dues
of the Bank have been liquidated. The evidence is not
specific. One of the mortgagors claims to have paid a
portion of the Imperial Bank's dues by selling ornaments of the ladies of his family, thereby directly
suggesting that no portion of the mortgagee's money
was utilised for payment of the dues of the Imperial
35
1957
N. Subramania
Iyer
V.·
The 0 fficial
Receiver,
Qui/on
Suzha J.
1951
N. Subramania
Iyer
••
The Official
Receiver,
Qui/on.
Sinha J.
274
SUPREME COURT REPORTS
[1958]
Bank. The High Court rightly refused to accept the
mortgagors' belated attempt to prove by their bare
testimony that any amount out of the consideration of
the mortgage bond in question had remained unpaid.
The Receiver's evidence was directed mostly to making
statements suggesting that the mortgagee had not
made such enquiry about the financial position and
status of the mortgagors as a reasonable man of
business would do.
He has not made any definite
statement that the mortgage bond in question was
without consideration. In cross-examination he has
been constrained to admit that he did not remember to
have examined the mortgagor who was in charge of
the business (first counter petitioner). He admits that
it is usual for an Official Receiver to examine the
insolvent. He has said further that he did not consider
it necessary to examine the insolvents regarding the
subject-matter of the petition for annulment. He also
admitted that he had not examined any of the accounts
to see whether the insolvents had received the entire
consideration of the mortgage in question, and that
"the mortgagee Nilakanta Iyer is a very rich man.
My information is that the insolvent had no dealings
with him before.