JUDGMENT
1. This is a second appeal from an order of the Additional District Judge of Meerut which was passed on 21st April 1934, in an insolvency matter. It appears that on 12th March 1929, one Kacheru Mal instituted a suit against Kannu Mal and Jagannath and obtained an injunction to restrain the defendants from alienating their immoveable property; and that injunction was served upon the said Kannu Mal and Jagannath on the 14th of March. On the 15th of March the two debtors executed a mortgage for Rs. 15,000 in favour of one Bhola Nath and executed a sale-deed in respect of seven houses for Rs. 10,000 in favour of one Raghubar Dayal. We are not concerned at present with those transfers, but certain other transfers were effected by the debtors on the 2nd of April and the 5th of April 1929 and these are the transfers with which the present appeal is concerned. On the 2nd of April the debtors assigned two mortgage bonds in favour of Rahtu Mal, a decree in favour of Sheo Singh Rai, a mortgage-bond in favour of Harbans Lal and Shankar Lal and a mortgage-bond in favour of Bishambhar Sahai; and on the 5th of April they assigned a mortgage-bond in favour of Hardeo Sahai. Meanwhile on the 4th of April certain creditors, whose debts amounted to Rs. 18,000, presented a petition for the adjudication of Kannu Mal and Jagannath as insolvents. On 25th October 1929 the aforesaid debtors were adjudged insolvent and on 18th January 1930, the Official Receiver applied to the Court for setting aside the transfers above referred to under Section 54, Insolvency Act. The Insolvency Court dismissed the application of the Official Receiver, holding that the debtors had made the transfers in question in order to meet the pressing demand of their creditors. The learned Judge observed that:
The debtors were ready to make similar settlement with Kacheru Mai and other creditors, but they did not agree to it and wanted cash payment.
2. In appeal the learned District Judge has found that the transfers were made in order to give preference to the transferee creditors and that the said transfers must be deemed fraudulent as against the Official Receiver. Against that order this second appeal has been presented. A preliminary objection has been taken by learned Counsel for the respondents to the effect that no second appeal lies from the said order. This Court has very wide powers of revision under the Insolvency Act, and it is immaterial whether we treat this case as an appeal or as a revision; we have to satisfy ourselves in any event whether the order of the Additional District Judge was or was not according to law. On behalf of the appellants it is pleaded before us that the lower appellate Court has wrongly cast the onus upon them and that no fraudulent preference can be inferred from the facts. As regards the burden of proof, the learned Judge relies upon the case in Official Receiver v. Kewalmal Ajumal A.I.R. 1926 Sind. 123 for the proposition that where a transfer has been executed on the eve of bankruptcy the onus shifts to the transferor to prove that there was no intention of making a fraudulent preference. The learned Judge who decided that case observed as follows:
No doubt it is well settled that where the Official Receiver or the trustee in bankruptcy challenges the validity of a payment made by the insolvent to his creditors under Section 54, Provincial Insolvency Act, or under the corresponding section of the English Bankruptcy Act...the onus is in the first instance cast on the Official Receiver or the trustee in bankruptcy of proving that the dominant or the substantial or effective, though not necessarily the sole, motive the insolvent had in view in making such payments was to prefer that particular creditor.... But the onus is shifted on to the bankrupt to prove the contrary when he makes such payments on the eve of his bankruptcy....
3. Under Section 54, Insolvency Act, a transfer is only voidable if the person making it is adjudged insolvent on a petition presented within three months after the date of such transfer and therefore in the very nature of things any transfer to which this section applies must be made on the eve of bankruptcy. It would be difficult to say that any particular date within this brief period of three months was other than on the eve of bankruptcy." The petition for adjudication in this case was presented by creditors and not by the debtors themselves, and it cannot be said with any certainty that the debtors knew or had reason to know that any such petition was about to be presented. If the view taken in the Sind case be correct, it would follow according to our view as to what constitutes the "eve of bankruptcy" that in proceedings under Section 54 of the Act the onus is at the outset on the debtor. With the greatest respect to the learned Judge, who tried the case cited above we are of opinion that there is no sufficient justification for qualifying in this manner the meaning to be attached to the pronouncement of their Lordships of the Privy Council in Sime, Darby & Co. Ltd. v. Official Assignee of the Estate of Lee Pang Sang A.I.R. 1928 P.C. 77, where they laid down that:
In determining the question whether a transfer is to be deemed fraudulent and void as against the official assignee in bankruptcy, the onus is on the assignee to show that the case is within the statute.
4. The same rule was laid down by the House of Lords in Sir William Henry Peat v. Gresham Trust, Ltd. (1934) A.C. 252. In that case an order was made for the compulsory winding up of a debtor company and it was held that:
The onus was on the liquidator to satisfy the Court that the dominant intention of the company in withdrawing its opposition to the application for an extension of time was to prefer the respondents and, there being no direct evidence of such an intention, an intent to prefer, could not be inferred.
5. There can be no doubt whatever that the onus lies primarily on the Official Receiver to show that the transfer was made with a view of giving preference to the creditor in whose favour it was made; but when once that has been proved, such transfer will be deemed fraudulent and void as against the receiver if the debtor is adjudged insolvent upon a petition presented within three months of the date of such transfer. The words "with a view of giving that creditor a preference" have been interpreted as meaning that, what the debtor did was an act of free will and that his dominant intention in performing that act was to prefer such creditor : vide T.S. Ramaswami Iyengar v. Chhinnathambi Kone A.I.R. 1932 Mad. 459 and Bashiran v. Moti Ram A.I.R. 1933 All. 431. Thus there can be no doubt that the onus lay primarily upon the Official Receiver in this case to show that Kannu Lal and Jagannath effected those transfers with the dominant object of preferring those creditors in whose favour the transfers are made. It is true that in Sime, Darby & Co. Ltd. v. Official Assignee of the Estate of Lee Pang Seng A.I.R. 1928 P.C. 77, referred to above, their Lordships observed that When all the circumstances have been ascertained, so far as the parties have thought fit to ascertain them, discussion on the point (i.e., on the burden of proof) becomes immaterial and the decision must be come to on the whole of the circumstances so ascertained; and the question of onus only becomes important if the circumstances are so ambiguous that a, satisfactory conclusion is impossible without resort to it.
6. In the present case, however, we are of opinion that all the circumstances have not been sufficiently ascertained and there are certain issues which the Courts below ought to have determined; and without a finding upon them it is impossible for us satisfactorily to dispose of this revision. We accordingly remit the following issues for decision to the lower appellate Court : (1) What was the amount of debt which Kannu Mal and Jagannath owed to each of the creditors to whom transfers were made on 2nd April 1929, and on 5th April 1929? (2) What was the value, at the date of their transfer, of the mortgage deeds and the decree which were thus transferred? (3) Of what property were the debtors possessed after making such transfers apart from the property which was mortgaged to Bbola Nath and the houses which were sold to Raghubar Dayal? (4) What was the total indebtedness of Kannu Mal and Jagannath immediately before the transfers of 2nd April and 5th April 1929? (5) What amount of debt was due from Kannu Mal and Jagannath to Bhola Nath and Raghubar Dayal and what debts were liquidated by such transfers? (6) Whether Hardeo Sahai, to whom the transfer was made on 5th April 1929, was aware of the fact that a, petition for the adjudication of the debtors had been presented to the Court on the 4th April? The parties will be at liberty to adduce such evidence as may be relevant to the above issues. The Court below should submit its findings within three months from this date. Thereafter the usual 10 days will be allowed for filing objections.
7. On receipt of the findings of the lower Court, their Lordships delivered the following judgment.
JUDGMENT
8. The facts out of which this second appeal from order arises are set out in full in our order dated 20th November 1935. Under that order we remitted the following issues to the lower appellate Court:
1. What was the amount of debt which Kannu Mal and Jagannath owed to each of the creditors to whom transfers were made on 2nd April 1929 and on 5th April 1929? 2. What was the value, at the date of their transfer, of the mortgage deeds and the decree which were thus transferred? 3. Of what property were the debtors possessed after making such transfers apart from the property which was mortgaged to Bhola Nath and the houses which were sold to Eaghubar Dayal? 4. What was the total indebtedness of Kannu Mai and Jagannath immediately before the transfers of 2nd April 1929? 5. What amount of debt was due from Kannu Mai and Jagannath to Bhola Nath and Eaghubar Dayal and what debts were liquidated by such transfers? 6. Whether Hardeo Sahai, to whom the transfer was made on 5th April 1929, was aware of the fact that a petition for the adjudication of the debtors had been presented to the Court on the 4th April?
9. The learned Judge of the lower appellate Court has now returned his findings. He finds that the amount of debt which Kannu Mai and Jagannath owed to the creditors to whom transfers were made on 2nd April 1929 and 5th April 1929 was Rs. 10,039-8-0; that the total value of the mortgage-deeds and decrees which were transferred on the aforesaid dates was Rs. 8,100; that the value of the debtor's assets, after making the aforesaid transfers and excluding the property which has been mortgaged, to Bhola Nath and the property which had been sold to Raghubar Dayal, was Rs. 3,332-13-6; that the total indebtedness of Kannu Mai and Jagannath immediately before the transfers of 2nd April 1929 and 5th April 1929, was Rupees 56,390; that the face value of the debts due from Kannu Mai and Jagannath to Bhola Nath and Eaghubar Dayal was Rs. 15,000 and Rs. 10,000 respectively and sthat these debts were ostensibly satisfied by transfers made on 15th March 1929; .and that Hardeo Sahai creditor was aware on 5th April 1929 of the fact that a petition for the adjudication of the debtors had been presented to the Court on 4th April 1929. There are certain errors of calculation in the findings of the learned Judge and they have had to be rectified in this Court. It will have been observed that on 12th March 1929, Kacheru Mal creditor instituted a suit against Kannu Mal and Jagannath and obtained an injunction to restrain them from alienating their property. This injunction was served on them on 14th March 1929, and on the very next day Kannu Mal and Jagannath executed a mortgage in respect of certain property for Rs. 15,000 in favour of one Bhola Nath, and on the same clay they executed a sale deed in respect to seven houses for Rs. 10,000 in favour of one Raghubar Dayal. Both the above transfers have since been set aside and it appears from the judgment of the Court below that the debt purporting to be due to Bhola Nath was held to be fictitious. We have no information as regards the debt of Raghubar Dayal. On 2nd April 1929, and again on 5th April 1929, certain transfers were made and these also were in due course challenged by the Official Receiver under Section 54, Provl. Insol. Act. It is with those transfers that the proceedings out of which the present appeal arises were concerned. The total indebtedness of Kannu Mal and Jagannath on 2nd April 1929, after excluding Bhola Nath's fictitious debt and including the debt of Raghubar Dayal, amounted to Rs. 61,139-8-0. On 2nd April and again on 5th April 1929, the debtors in order to pay debts of the value of Rs. 10,039-8-0 transferred mortgage-deeds and decrees of which the value was Rs. 8,012, not Rs. 8,100 as held by the lower appellate Court.
10. After making the transfers on 2nd and 5th April 1929, assets were left in the hands of the debtors which were sold at auction for a sum of Rs. 3,332-13-6. Having regard to the fact that things which are sold at auction seldom fetch their full value, we would estimate the value of these assets at approximately Rs. 5,000. The debtors had thus left themselves on 5th April 1929 with Rs. 5,000 odd to meet liabilities of approximately Rs. 51,000. It is contended before us by learned Counsel for the transferee-creditors that the value of the property which was transferred to Bhola Nath and to Raghubar Dayal on 15th March 1929 should be added to this sum of Rs. 5,000 in view of the fact that the transfers of 15th March 1929 have since been set aside. We are unable to accept this plea. We have to endeavour to see what was in the mind of the debtors; and it is obvious that on their own showing, i.e. according to the position which they themselves assumed, they were not in possession of this property at all; and therefore the amount of Rs. 25,000, which was the consideration for the transfer of property to Bhola Nath and Raghubar Dayal, cannot be added to the sum of Rs. 5,000 in order to ascertain what assets were left with the debtors after the transfers which were made on 2nd and 5th April 1929. Learned Counsel for the transferee-creditors has referred us to the case in K.P.A.P. Chettiar Firm v. U. Maung A.I.R. 1934 Rang. 208, in which a Bench of the Rangoon High Court in dealing with a matter under Section 54, Insolvency Act, relied upon certain English cases. The first of those cases was Johnson v. Fesenmeyer (1858) 25 Beav. 88 in which the Master of the Rolls stated the following principle:
If a man is insolvent, and disposes of a portion of his property in favour of a bona fide creditor, although upon the eve of bankruptcy, and although this fact be known or believed by both parties, it may be a perfectly valid and legal transaction. To render it invalid there must be a disposition on the part of the insolvent to favour that particular creditor, and this is generally shown by the fact that the first step or proposal towards the disposal of the property in favour of that creditor proceeds from the insolvent debtor. But if the creditor, although ho knows that the debtor is insolvent, presses and insists upon having a security for his debt and the debtor yields to that pressure, and gives the security, although it may be well known to both, at the same time, that the effect will be to give to that particular creditor' an advantage over the other creditors of the insolvent, the transaction, in my opinion, is perfectly good and valid.
11 The next English case which was referred to is that in Smith v. Pilgrim (1876) 2 Ch. D. 127 in which it was observed that:
A debtor must not of his own mere motion, without pressure or application, give a security to a creditor on the eve of bankruptcy, and if he does that is a fraudulent preference. But if there be any pressure or negotiation for a security on the part of the creditor then the fact that the creditor knows the debtor to be in embarrassed circumstances is no objection to the validity of the security.
12. We have also been referred to a case of the Lahore High Court Sundar Singh v. Bakhshi Shiv Ram A.I.R. 1933 Lah. 354, where a learned Judge of that Court observed as follows:
Now the only substantial fact found against the appellant is that the transaction in her favour was effected by the debtors when they were in imminent expectation of bankruptcy. But this by itself is not sufficient to prove the intention to give fraudulent preference. The word "preference" imports a free choice, and it is necessary for the receiver to prove that the debtor's act was voluntary and not due to extraneous influence such as pressure or threat from the creditor.
13. In the last-mentioned case the debtors had been threatened with a suit in case the amount due to the appellant-creditor was not paid or security therefor was not furnished. In the present case there is little evidence worth the name to show that any pressure was brought to bear on Kannu Mal and Jagannath. It does not appear that any notice of demand was ever issued or served upon the debtors, and at the original hearing the only evidence on the subject was given by one of the creditors, by name Shankar Lal. After referring to the sale deeds detailed in the petition under Section 54, he stated that, with the exception of those in favour of Hardeo Sahai and Sheo Singh Rai, the others "were executed because the transferees demanded payment of their debts and became impatient." The learned Judge who heard the original appeal found as a fact that no pressure had been brought to bear upon the debtors. He says:
There is, in my opinion, no satisfactory evidence to show that pressure was brought on the transferors and that they executed the transfers to save themselves. There is only the statement of Shankar Lal who is an interested party.
14. It is true that after remand two other creditors, by name Bishambhar Sahai and Harbans Lal, have also gone into the witness-box and stated that demands were made for payment; but this evidence, given at such a late stage of the proceedings, is - obviously of little or no value. Even if the: evidence of Shankar Lal - which has been disbelieved by the learned Judge of the Court below - were accepted, it would hardly suffice to show that the creditors had made demands with such importunity as to deprive the debtors of all volition in the matter. It is true that the onus lay primarily upon the receiver, but he was not in a position to show the workings of the debtors' mind and it was a matter of extreme difficulty for him to prove affirmatively that there was in fact no pressure on the part of the creditors and that what the debtors did was a voluntary act-On the other hand, if pressure was in fact exercised, it ought not to have been difficult for the creditors to adduce satisfactory proof. In order to arrive at a finding as to whether the debtors made these transfers on 2nd and 5th April 1929 with a view of giving the transferee-creditors a preference, over other creditors, all the circumstances; and the probabilities will have to be taken into account.
15. Since the two transfers in respect of property of considerable value which were made on 15th March 1929, i.e., about a; fortnight previously, were set aside, it is obvious that there must have been an element either of fraud or of undue preference therein. This indicates a want of honesty towards the creditors as a body. Then we find that, after making the transfers which are now in question on 2nd ands 5th April, the debtors were left with a paltry sum of Rs. 5,000 odd in order to pay debts to the amount of approximately Rs. 51,000. They had placed these creditors in a highly favourable position and so far as we can see, they derived very little benefit themselves from these transfers. The learned Judge who originally heard the appeal states in his judgment dated 21st April 1934, that the insolvents and those creditors in whose favour transfers were made on 2nd and 5th April 1929, are residents of Faridnagar whereas the petitioning creditors live at Meerut. This fact is not without significance. Having regard, to all the above circumstances we are of opinion that the only reasonable inference-which can be drawn is that Kannu Mal and Jagannath voluntarily made these transfers on 2nd and 5th April 1929, and that they did so with a view of giving the transferee-creditors a preference over other creditors. The above being our view, this appeal fails and is dismissed with costs.