SPECIAL LEAVE PETITION 26 of 1998 on 13 July 1998

A.Nos.144 and 285 of 2009 and 131, 346 and 374 of 2010 in I.P.No.26 of 1998V. RAMASUBRAMANIAN, J

A Partnership Firm by name M/s.Vijayalakshmi Trading Company, represented by its partners S.Ashokkumar and S.Prabhakar Rao, were adjudicated as insolvents, by this Court, by an order dated 13.7.1998 passed in I.P.No.26 of 1998, at the instance of a creditor by name S.Pattabhiraman. There were also other petitions at the instance of a few other creditors.

2. In the course of administration of the Estate by the Official Assignee, it was found that the total liability of the insolvents to the unsecured creditors, was Rs.1,76,000/-. In pursuance of an order passed by this Court in A.No.362 of 2005, the insolvents deposited an amount of Rs.1,76,000/- with the Official Assignee, by way of a Bankers cheque towards satisfaction of debts due to the unsecured creditors. The insolvents also deposited a further amount of Rs.18,870/- on 29.8.2005 with the Official Assignee.

3. In the meantime, a property being the house and premises bearing old Door No.21, New No.6/3, Chinnathambi Mudali Street, Chennai-79, measuring an extent of about 854 sq. ft., of land, which belonged to one of the insolvents viz., S.Prabhakar Rao, was brought to sale. One Mr.P.Raghuramiah, became the highest bidder and the sale in his favour was confirmed by this Court by an order dated 1.8.2005 passed in A.Nos.587 of 2004, 636 of 2004 and 362 of 2005. On 10.8.2005, the auction purchaser remitted the entire sale consideration and on 25.8.2005, the auction purchaser also submitted the draft sale deed to the Official Assignee.

4. As against the order confirming the sale and rejecting an application for setting aside the sale, the insolvents filed appeals in O.S.A.Nos.194, 195 and 196

of 2005. The appeals were dismissed on 16.11.2005. The special leave petition filed by the insolvents in S.L.P.(Civil) No.7010 of 2006 was also dismissed on 4.1.2010. A petition for review was filed by the insolvents before the Supreme Court in Review Petition (C) No.816 of 2010 and the same was also dismissed on 28.4.2010.

5. In the meantime, the auction purchaser made repeated demands, requesting the Official Assignee to execute the sale deed. Since the Official Assignee did not execute the sale deed, the auction purchaser has come up with an application in A.No.131 of 2010 under Section 87 of the Presidency Towns Insolvency Act, seeking a direction to the Official Assignee to execute a sale deed.

6. However, the insolvents have come up with 3 applications viz., (i) A.No.285 of 2009, seeking a direction to the Official Assignee to return the balance amount lying with him (ii) A.No.144 of 2009 to annul the order of adjudication and (ii) A.No.346 of 2010 to review the order dated 1.8.2005, by which the sale was confirmed. Upon coming to know of these applications, the auction purchaser has filed one more application viz., A.No.374 of 2010.

7. Thus there are 3 applications filed by the insolvents viz.,

(i) A.No.144 of 2009 to annul the order of adjudication.

(ii) A.No.285 of 2009 to direct the Official Assignee to refund the balance amount and

(iii) A.No.346 of 2010, to review the order dated 1.8.2005.

Similarly, there are 2 applications filed by the auction purchaser viz.:-

(i) A.No.131 of 2010, seeking a direction to the Official Assignee to execute the sale deed.

(ii) A.No.374 of 2010 to implead himself as a party to the review application in A.No.346 of 2010.

8. Since all the applications are intertwined with each other, they were taken up together and I have heard Mr.R.Krishnaswamy, learned Senior Counsel appearing for the insolvents, the learned Official Assignee and Mr.V.Shanmugam, learned counsel appearing for the auction purchaser.

9. Out of the 5 applications on hand, 2 could be disposed of without much ado, in view of the fact that there are only two parties to these applications viz., the insolvents and the Official Assignee and also in view of the fact that scope of the dispute in these applications is very narrow. Therefore, let me now first take up these two applications viz., A.Nos.144 and 285 of 2009.A.Nos.144 and 285 of 2009:

10. As stated earlier, A.No.144 of 2009 is to annul the order of adjudication and A.No.285 of 2009 is for a direction to the Official Assignee to return the balance amount lying with him.

11. In his report filed in A.No.144 of 2009, the Official Assignee has stated that the insolvents earlier filed applications in A.Nos.171, 172 and 173 of 2001, seeking to set aside the order of adjudication passed on 13.7.1998. But, these applications were dismissed on 12.3.2001. An application for review of the order in A.No.113 of 2002 was also dismissed on 18.3.2002. The insolvents filed their schedule of affairs on 20.4.2005, after 4 years and 8 months, disclosing their total liability to the extent of Rs.3,76,000/- to 12 unsecured creditors and one secured creditor. The house property at old No.21, New No.6/3, Chinnathambi Mudali Street, Chennai-79, was disclosed in the schedule of affairs as one of the assets of the insolvents. The secured creditor viz., Muthialpet Benefit Fund Ltd., filed the claim for Rs.18,96,150.50 and 12 unsecured creditors filed their claims for Rs.6,30,905.10. Thus, the total amount of liabilities (both secured and unsecured) worked out to Rs.25,27,055.60. The insolvents claim that the dues to the secured creditor viz., Muthialpet Benefit Fund Ltd., was fully settled and the mortgage was redeemed by a document bearing No.1326/2008 dated 5.12.2008. Though the Official Assignee has stated in his report that the insolvents ought not to have dealt with the secured creditor without his knowledge, the Official Assignee has nevertheless confirmed the receipt of a letter from Muthialpet Benefit Fund Ltd., dated 11.8.2009 to the effect that the claim is settled fully.

12. As per the schedule of affairs originally filed on 20.4.2005, the total liability of the insolvents to the unsecured creditors was fixed at Rs.1,76,000/-. This amount was deposited on 20.7.2005 in pursuance of an order passed in A.No.362 of 2005. An additional amount of Rs.18,870/- was deposited on 29.8.2005. Therefore, the insolvents claim (i) that the debt due to the secured creditor namely Muthialpet Benefit Fund Limited has been settled and (ii) that the debts payable to the unsecured creditors have also been settled.

13. In the report of the Official Assignee, he has claimed that the schedule of affairs was filed by the insolvents on 20.4.2005, after 4 years and 8 months. In paragraph 6 of the report, it is claimed that the secured creditor namely Muthialpet Benefit Fund Limited filed a claim for Rs.18,96,150/- and that the other 12 unsecured creditors filed claims to the tune of of Rs.6,30,905/-. However, it is admitted by the Official Assignee in his report that he received a letter dated 11.8.2009 from the secured creditor to the effect that their claim has been settled fully.

14. From the report of the Official Assignee, it is clear that the claim made by the insolvents as though sufficient amount for the discharge of the dues to the unsecured creditors has already been deposited, is factually incorrect. The amount needed to discharge the dues to the unsecured creditors as per the report of the Official Assignee is about Rs.6,30,905/-. But, as per the affidavit in support of A.No. 144 of 2009, the insolvents deposited only a sum of Rs.1,94,870/-. Moreover, the insolvents have stated in paragraph 5 of the affidavit in support of the application for annulment that there is no secured debt at all. This statement appears to be false. The fact that an amount was paid to Muthialpet Benefit Fund Limited and that they issued a letter of discharge and redemption of mortgage is borne out by the report of the Official Assignee. Therefore, it is clear that the insolvents have come up with a false averment in their affidavit and attempted to settle the unsecured creditors outside the Court without even the knowledge of this Court. Hence, the application for annulment is liable to be dismissed, both on the ground that the amount payable to the unsecured creditors as per the report of the Official Assignee is more than the amount already deposited by the insolvents and also on the ground that the affidavit contains a false averment.

15. In their application in A.No.285 of 2009, the insolvents had claimed that they borrowed money from outside and settled the entire dues of the secured as well as unsecured creditors. The insolvents have also filed, a typed set of papers containing the letters of the unsecured creditors withdrawing their claims. All these letters of the unsecured creditors withdrawing their claims are dated on the same day namely 12.2.2010. In other words, these letters of withdrawal of their claims have been obtained by the insolvents, after filing the application A.No.285 of 2009.

16. Interestingly, in paragraph 2 of the affidavit in support of A.No.285 of 2009, the insolvents admit that there was one secured creditor namely Muthialpet Benefit Fund Limited. But, in paragraph 5 of the affidavit in support of A.No.144 of 2009, the insolvents have stated that there is no secured debt at all. Similarly, there is one more contradiction. In the affidavit in support of A.No.144 of 2009, the insolvents have not claimed that they borrowed money from outside and settled the same even to the unsecured creditors. But, in the affidavit in support of A.No.285 of 2009, they made such a claim.

17. Interestingly, the affidavit for refund of money filed in A.No.285 of 2009 on the ground that the unsecured creditors were already paid their dues, was sworn to in February 2009. But, the affidavit in support of A.No.144 of 2009 for annulment was sworn to in April 2009.

18. As seen from the sequence of events, the order of adjudication was passed on 13.7.1998. The order of adjudication was received by the insolvents on 13.12.2000. Immediately, they filed applications bearing Nos.171, 172 and 173 of 2001, seeking to set aside the order of adjudication. Those applications were dismissed on 12.3.2001. The review application was also dismissed on 18.3.2002. The insolvents filed a schedule of affairs only on 20.4.2005. Therefore, the Official Assignee invited claims and the unsecured creditors have lodged claims.

19. It is only thereafter that the insolvents claim to have borrowed money from outside and settled the claims of the unsecured creditors. In law, the insolvents could not have done this. While a secured creditor may be entitled to stand outside the insolvency proceedings, unsecured creditors cannot. Therefore, both on facts and on law, A.Nos.144 and 285 of 2009 are liable to be dismissed.

20. Accordingly, A.Nos.144 and 285 of 2009 are dismissed.

21. Mr.R.Krishnasamy, learned Senior Counsel appearing for the insolvents relies upon the decision of the Full Bench of this Court in Periyakaruppan Vs.

Arunachalam [AIR 1940 Madras 375 (FB)], wherein it was held that when an adjudication has taken place under the Provincial Insolvency Act and it had been shown that no act of insolvency had been committed, the Court has no discretion in the matter except to annul the adjudication.

22. In Thangavelu Vs. Chockalingam [AIR (31) 1944 Madras 129], a Division Bench of this Court was concerned with a case where an application was moved by the insolvent for revocation of an order of sale of his house to his own cousin brother. The claim of the insolvent in that case was that owing to the sale of other properties and other circumstances, the insolvent was in a position to pay 16 annas in a rupee to his creditors and that therefore, there was no necessity to sell the house. The Insolvency Judge rejected the application of the insolvent. But, the Division Bench reversed the order and allowed the appeal, holding that once the basis for the original order of adjudication had disappeared, the Court should save, from the sale, the property of the insolvent. An argument was advanced before the Division Bench on the basis of Section 23 of the Presidency Towns Insolvency Act, under which, all acts done by the Official Assignee, are declared to be valid, even where an adjudication is annulled. The Division Bench held that the object of Section 23 was to preserve accomplished acts and that Section 23 was not a bar for the Court acting under Section 8.

23. In Narandas Karsondas Vs. S.A.Kamtam & Another [AIR 1977 SC 774] relied upon by the learned Senior Counsel for the insolvents, the Supreme Court pointed out that under Section 69(3) of the Transfer of Property Act, the mortgagor does not lose the right of redemption, until a sale is completed by registration. This judgment was relied upon in support of the contention that once a mortgage is redeemed, the property vests back with the insolvents, making them solvents. Once the insolvents have become solvents, their right of annulment cannot be defeated.

24. I have carefully considered the above submissions.

25. The application for annulment has been filed by the insolvents under Section 21 of the Presidency Towns Insolvency Act, 1909. Section 21 reads as follows :

"Power for Court to annul adjudication in certaincases:(1) Where, in the opinion of the Court, a debtor ought not to have been adjudged insolvent, or where it is proved to the satisfaction of the Court that the debts of the insolvent are paid in full, the Court shall, on the application of any person interested, by order annul the adjudication and the Court may, of its own motion or on application made by the official assignee or any creditor, annul any adjudication made on the petition of a debtor who was, by reason of the provisions of Sub-Section (2) of Section 14, not entitled to present such petition.

(2) For the purposes of this section, any debt disputed by a debtor shall be considered as paid in full, if the debtor enters into a bond, in such sum and with such sureties as the Court approves, to pay the amount to be recovered in any proceeding for the recovery of or concerning the debt, with costs, and any debt due to a creditor who cannot be found or cannot be identified shall be considered as paid in full if paid into Court."

26. As seen from Section 21, an order of adjudication can be annulled by the Court on the application of any person interested, if, in the opinion of the Court, anyone of the following contingencies is satisfied :

(i) a debtor ought not to have been adjudged insolvent or

(ii) where it is proved to the satisfaction of the Court that the debts of the insolvent are paid in full.

27. The case on hand will not fall under the first category. This is in view of the fact that the applications filed by the insolvents in A.Nos.171, 172 and 173 of 2001 to set aside the order of adjudication passed on 13.7.1998 were dismissed, way back on 12.3.2001. Therefore, the insolvents cannot contend that they ought not to have been adjudged insolvents. At the most, the case of the insolvents may fall under the second category, under which, a Court can annul the adjudication, if the debts of the insolvents have been paid in full.

28. The claim of the insolvents in A.No.144 of 2009 is that they have paid the debts in full. But, as I have pointed out earlier, they enclosed the letters allegedly given by all the unsecured creditors on the same day namely 12.2.2010. But, the application for annulment was filed in 2009 itself. The letters of the unsecured creditors produced by the insolvents, were obtained after the date of filing of the application for annulment. These letters are not receipts for payment of money. They are only letters of withdrawal of their claims. The affidavits in support of the application for annulment and the application for refund of money contain several contradictions. Therefore, it is not proved to my satisfaction that the debts of the insolvents are paid in full. Hence, the contingencies stipulated in Section 21(1) are not satisfied. Consequently, the application for annulment cannot be ordered.

A.No.374 of 2010 :

A.No.374 of 2010 :

29. This is an application filed by the auction purchaser to implead himself as a party to the review application A.No.346 of 2010. The auction purchaser is a necessary and proper party to the review application. If A.No.346 of 2010 is allowed, the auction purchaser will automatically lose the right conferred upon him by the confirmation of sale. Therefore, he is entitled to be impleaded. Hence, A.No.374 of 2010 is allowed.

A.No.346 of 2010 :

30. This is an application filed by the insolvents seeking a review of the order dated 1.8.2005 passed in A.No.587 of 2004. This application is filed on the ground that during the pendency of the proceedings, all the debts payable to the creditors have been settled. Therefore, the necessity for sale had disappeared. In sum and substance, the basis of the application A.No.346 of 2010 is the pendency of the application in A.No.144 of 2009 for annulling the order of adjudication.

31. But, this application is liable to be dismissed for several reasons, some of which are as follows :

(i) I have today dismissed A.No.144 of 2009. Therefore, the foundation for this application also goes. Once the foundation for this application goes, this application should also follow suit.

(ii) The order dated 1.8.2005, which is sought to be reviewed in this application, has already attained finality. By the order dated 1.8.2005 passed in A.No.587 of 2004, the auction sale conducted by the Official Assignee was confirmed by this Court. The appeals preferred by the insolvents in O.S.A.Nos.194 to 196 of 2005 were dismissed. The special leave petition was dismissed on 4.1.2010 and the review application was also dismissed on 28.4.2010.

32. Therefore, the present application is nothing but an attempt to reopen the aforesaid issue. Hence, A.No.346 of 2010 is dismissed.A.No.131 of 2010 :

33. This is an application filed by the auction purchaser for a direction to the Official Assignee to execute the sale deed.

34. I have already narrated the facts, out of which, all the above applications arose. I have dismissed the application for annulment filed by the insolvents and I have also dismissed the application for reviewing the order dated 1.8.2005. Therefore, what remains is only the execution of the sale deed in favour of the auction purchaser.

35. In his report, the Official Assignee had stated that the first auction sale was held on 1.10.2003. The highest bidder quoted an amount far lesser than the reserve price. Therefore, a second auction sale was conducted on 16.12.2003. There was only one bidder, who was the very same person, who participated in the first auction. He raised his offer only by Rs.10,000/-. Still, the gap between the reserve price and his quotation was so huge and hence, a third auction was conducted on 26.2.2004. The very same person participated and he quoted Rs.10,000/- more than the price quoted in the second auction. Therefore, on an application in A.No.587 of 2004 taken out by the Official Assignee, a learned Judge of this Court passed an order dated 1.8.2005 confirming the sale in favour of the auction purchaser. The insolvents filed objections in A.No.588 of 2004. This application was dismissed. Thereafter, an application to set aside the sale was filed in A.No.636 of 2004. The Official Assignee, in the meantime, removed the insolvents from possession and hence, another application in A.No.362 of 2005 was filed for taking back possession. Both the applications were dismissed on 1.8.2005. As against these orders, three appeals were filed, all of which were dismissed by a Division Bench of this Court on 16.11.2005. The special leave petition in S.L.P.(Civil) No.7010 of 2006 was dismissed by the Supreme Court on 4.1.2010. Therefore, the matter has attained finality and there is no alternative except to direct the execution of the sale deed.

36. As rightly contended by Mr.V.Shanmugam, learned counsel for the auction purchaser, irrespective of the outcome of the application for annulment, his client is entitled to have the sale deed executed. It was held in Wazirey Vs. Mathura Prasad [AIR 1939 Oudh 55], that where an insolvent's property is sold by the Receiver with the sanction of the Insolvency Court before the order of adjudication was annulled, the Receiver has the power to execute the sale deed even after the annulment.

37. Similarly, in The Official Receiver, Madurai Vs. P.N.Krishnaier [1982 MLJ 460], this Court held that in spite of an order of annulment, the Official Receiver is bound to carry on the administration of the estate. The Official Receiver will have to realise the amount due to the estate during the period and account for the sale to the persons concerned.

38. InSree Narayana Dharmasanghom Trust Vs. Swami Prakasananda [1997 (6) SCC 78], the Supreme Court held that even the dismissal of a special leave petition in limine operates as a final order between the parties and that any order passed by the High Court subsequently operates as res judicata. Therefore, today, the insolvents cannot object to the execution of a sale deed on the specious plea that they filed an application for annulment.

39. In Tukaram Ramchandra Mane Vs. Rajaram Bapu Lakule [1998 (4)

SCC 317], the Supreme Court held in relation to Section 37(1) of the Provincial Insolvency Act, 1920 that the expression 'act' appearing in Section 37(1), which is in pari materia with Section 23(1) of the Presidency Towns Insolvency Act, 1902, is too wide to include all acts. Therefore, the Supreme Court held that those acts done by the Court prior to the order of annulment cannot be reopened.

40. In Abbai Maligai Partnership Firm Vs. K.Santhakumaran [1998 (7)

SCC 386], the Supreme Court pointed out that after the dismissal of the special leave petition by the Supreme Court on contest, no review petition can be entertained against the same order.

41. Hence, A.No.131 of 2010 is allowed. The sale deed shall be executed within four weeks from the date of receipt of a copy of this order.

Index : Yes or NoInternet : Yes or No

31/7/2014

RS/kpl

V.RAMASUBRAMANIAN,JRS/kpl

Common orderA.Nos.144 & 285 of 2009 &131, 346 & 374 of 2010 in I.P.No.26 of 1998