P L D 1969 Karachi 339 (PLP)

Insolvency (Karachi Division and Dacca) Act (III of 1909), Ss. 15 & 21‑Person adjudged insolvent‑ Adjudication can be annulled by Court if petition was not bona fide or there has‑ been "abuse of the process of Court". Where the contention was that in proceedings under the Insolvency (Karachi Division and Dacca) Act, 1909 the insolvent's conduct and character have to be totally ignored and the order of adjudication should be maintained if the insolvent satisfies the conditions prescribed by section 15 of the Act: Held, the power to refuse, or to annul, adjudication if the peti tion for adjudication amounts to an abuse of the process of the court is inherent in Courts. The Insolvency (Karachi Division and Dacca) Act, 1909, in language is quite different from the old Provincial Insolvency Act, and under section 15 of the Act, the Court "may" make an order of adjudication. The Court has thus a. discretion to make or not to make such order. An adjudication may be refused, or annulled, if the petition in this behalf amounts to an abuse of the process of the Court or, even if there is no misconduct on the debtor's part, the debtor fails to prove that he is unable to. pay his debts. If an adjudication has been made, and if on subsequent investigation it is found that the debtor, was not unable to pay his debts when he presented his petition, then the adjudication may be annulled under the first limb of section 21 of the Act, which provides that an adjudication may be annulled if in the opinion of the Court the debtor ought not to have been adjudged insolvent. If a debtor is found to have concealed moneys, which are sufficient to discharge his debts, he cannot then be said to be unable to pay his debts, and it being s, the debtor in this case ought not to have been adjudged' insolvent. Hence the order of adjudication can be annulled on. the ground that the debtor has failed to prove that he was unable to pay his debts on the date on which he obtained the order of adjudication on his own petition. Since the material on record suggests that the debtor has concealed moneys which would otherwise have satisfied the debt which he owes to the two credi tors, the debtor's petition for adjudication should be held as distinctly foreign to the purposes of the insolvency law. The intention with which this petition was moved was obviously to save the debtor from arrest and detention in civil prison in the execution proceedings taken out by the creditors, and to further save himself from liability on the cheques which he had given to the creditors and which still remained upheld. This is not the purpose of the Insolvency Acts and, therefore, the debtor's peti tion can, with abundant justification, be treated as an act amounting to abuse of the process of the Court. Chhatrapat Singh Dugar v. Kharag Singh Lachmiram and others A I R 1916 P C 64; Kaka v. Nandoo and others A I R 1930 Lah. 644 and Sadhu Ram v. Kishori Lal A I R 1938 Lah. 490 distinguished. In re: Ballav Chand Serowgee A I R 1923 Cal. 703; Rajendra Prasad Tewari v. Nageshwar Upadhya and others A I R 1938 Pat. 368; Malchand v. Gopal Chandra Ghosal I L R 44 Cal. 899; Bindeshri Prasad v. Biso Singh A I R 1937 Pat. 62; Alamel umangsthayarammalv. T. S. Balusami Chetti A I R 1928 Mad. 394; R. Viswanatha Chetty v. Official Assignee of Madras A I R 1930 Mad. 544; In re: Bond (1888) 21 Q B 17 and In re : Betts (Ex parte: Official Receiver) (1901) 2 K B 39 ref. G. Raymond for the Debtor‑Insolvent. Iqbal Baloch for the Creditors. The question raised in these proceedings is whether the order of adjudication made on 14‑7‑1968 on the insolvent's own petition should be annulled. This question has arisen in these circumstances. The two creditors, namely, Ali Muhammad and Ismail, are the sons of late Haji Hassum. They are related to the insolvent, in that the latter's mother is the sister of the creditors' mother. The late Haji Hassum left Rs. 1,00,000 (Rupees one lakh) in Government Promissory Notes to his two sons. These notes were deposited with the Habib Bank Ltd., and the creditors were earning therefrom monthly interest of Rs.

270. The insolvent used to visit these young men from time to time, and held out to them prospects of earning much more on the assets left lay their father. The creditors say that some time in 1962, when Ali Muhammad was about 20 years old and Ismail 19 years old, they were persuaded by the insolvent to hand over to him the Government Promissory notes on the inducement that they would earn Rs. 500.00 to Rs. 600.00 from the business is which the insolvent would invest the amount of the G. P. Notes. The insolvent's version, on the other hand is that he, Ali Muhammad and Ismail entered into a partnership in July 1962, in the business of money‑lending and sale and purchase of shares. On 20th July 1962, an account was opened with the Habib Bank Limited, showing Ali Muhammad, Ismail :and the insolvent as partners. No written agreement of partnership was either executed or filed with the Bank. The Government Promissory Notes of Rs. 1,00,000 were endorsed by the creditors in favour of this bank and were used as security for an over‑draft of rupees one lakh granted by the Bank in this account. The account was operated only by the insolvent, who says that the business of partnership continued up to 17‑10‑1963, when, due to losses arising out of certain debts becoming bad debts, the partnership was dissolved and the two creditors executed a general declaration, confirming that the insolvent was not in any way responsible for these losses, but that he would make efforts to recover the loans advanced to the various debtors and the amount so recovered would be paid to the creditors. The latter deny that they executed this or other documents on which the insolvent placed reliance. According to them, the insolvent was their first cousin, in whom they reposed full confidence and trust, so much so that the insolvent used to take their signatures on blank papers from time to time, one of which 'lank papers, it is alleged, he converted into the general declaration produced by the insolvent in his support. That the creditors did not execute any such declaration is borne out by the subsequent conduct of the parties, as both the creditors continued to demand their money from the insolvent, and on his failure to make this payment, a report was made to the police, presumably under section 420, P. P. C. Thereafter the parties referred the disputes between them to the decision of the elders of the community, which decision is dated 18‑1‑1964 and was produced as Exh. 7 in Suit No. 148 of 1964 between the parties. The English translation of this document is Exh. 7/A. According to this decision, there was no partnership between the insolvent and the creditors, and the insolvent used the overdraft of Rs. 1,00,000 granted by the Habib Bank Ltd., in the aforesaid account for his own business and purposes. This decision further required the insolvent to reimburse the creditors with the amount of Rs. 1,00,000.00, out of which Rs. 50,000.00 were paid then, and the balance was made payable by 12 monthly instalments, 11 instalments being of Rs. 4,000 each, and the 12th instalment of Rs. 6,

000. The insolvent gave post‑dated cheques to the creditors for these amounts. One of the cheques, for Rs. 4,000.00, however was dishonoured when presented for payment, whereupon the creditors filed Suit No. 148 of 1964 in the Court of the District Judge on this cheque, which suit was decreed on 25‑5‑1966. This decree was sought to be executed by the arrest and detention of the insolvent, whereupon the latter presented his petition for adjudication to this Court under section 15 of the Insolvency (Karachi Division and Dacca) Act, 1909. The order of adjudication, as noted above, was made on 14‑7‑1966. The insolvent also obtained an order of interim protection under section 25 of the Act. He was publicly examined on 21st and 26th September and 4th October 1967. On the conclusion of this examination, the insolvent made an application for his discharge under section 38 of the Act, whereupon the creditors applied for annulment and recession of the order of adjudication.

2. The prayer for annulment of adjudication is made on two grounds ; i.e. (i) that the insolvent, by obtaining the order of adjudication, has abused the process of the Court, and (ii) that at the time of the order of adjudication the insolvent was not unable to pay his debts. The present case is governed by the Insolvency (Karachi Division and Dacca) Act, 1909, the relevant provisions whereof, for these proceedings, are sections 15 and

21. Under section 15, a debtor's petition should allege that the debtor is unable to pay his debts, and if the debtor proves that he is entitled to present the petition, the Court may make an order of adjudication. Under section 21, an order of adjudication may be annulled if the Court is of the opinion that the debtor ought not to have been adjudged insolvent, or if it is proved to the satisfaction of the Court that the debts of the insolvent have been paid in full. It is in the light of these provisions that the contentions of the creditors and the insolvent have to be examined.

3. Mr. C. Raymond, who appeared for the insolvent, contended that in proceedings under the Insolvency (Karachi Division and Dacca) Act, 1909, the insolvent's conduct and character have to be totally ignored, and the order of adjudication should be maintained if the insolvent satisfies the conditions prescribed by section 15 of the Act. The learned Advocate referred me to several English and Indian decisions on this point. Thus, In re : Painter (Ex parte : Painter) ((1895) 1 Q B 85), in which a creditor had obtained a judgment for 294 against a debtor who, though possessing an inalienable pension, obtained an order of adjudication on his own petition, but the Court held that the debtor's petition was not an abuse of the process of the Court. In re : Taylor (Ex parte : Taylor) ((1901) 1 Q B 744), annulment of adjudication was refused, even though it was found that the debtor had concealed a large sum of money. In re : Srcher (Ex pane: Srcher) ((1904) 20 T L R 390). it was held that the presentation of a petition for adjudication by the debtor himself with the intention of saving himself from a committal order did not justify annulment of adjudication. The same view prevailed In re : Harry Dunn (Ex parte: the Official Receiver v. Harry Dunn) ((1949) Ch. 640). Turning to the Indian cases, there is the Privy Council decision in Chhatrapat Singh Dugar v. Kharag Singh Lachmiram and others (AIR 1916 P C 64). This decision, given under the Provincial Insolvency Act, 1907, held that the order of adjudication did not depend on the Court's discretion, but was a statutory right of the debtor if he brought himself properly within the terms of the Act, and that the debtor could not be deprived of this right on the ground that his petition was an abuse of the process of the Court. Mr. Raymond then placed before me two decisions of the Lahore High Court: The first is Kaka v. Nandoo and others (A I R 1930 Lah. 644), in which it was held that even if the debtor acts mala fide and dishonestly in presenting the‑insolvency application by including therein fictitious items both under liabilities and assets, it is no ground for refusing the application if it is found that he is unable to pay his debts. The next case is that of Sadhu Ram v. Kishori Lal (A I R 1938 Lah. 490), wherein was held that inclusion of some fictitious debts in an application for adjudication did not justify the dismissal of the debtor's petition.

4. These decisions, in my opinion, turned mainly only on one point, that is, if it was found that the debtor was unable to pay his debts, then an order of adjudication should be made, and the debtor's conduct, according to one view, would then be irrelevant. The Judicial Committee of the Privy Council even rejected the ground of "abuse of the process of the Court" as sufficient to justify the rejection of a petition for adjudication or annulment of the adjudication (See Chhatrapat Singh Dugar v. Kharag Singh Lachmiram). But, in my opinion, the rule laid down in this case not only cannot be applied to the present state of law on the subject, but also ‑ departs from the view, which rests on judicial consensus, that Courts have inherent power to vacate orders obtained by abuse of judicial process. Probably, their Lordships were influenced in their decision by the language of the Provincial Insolvency Act of 1907, section 160) whereof' made it obligatory for the Court to make the order of adjudication if the Court did not proceed to dismiss the petition under section 15, which provided that the petition may be dismissed, if, amongst other things, the Court was not satisfied with the proof of the right of the petitioner to present the petition. It appears further to me that another reason for rejecting the ground of "Abuse of the process of the Court" as a relevant consideration may have been that there was material to show that the debtor was in fact unable to pay his debts. Perhaps it was in view of this fact that consideration of the debtor's conduct in the adjudication proceedings was disapproved. The Privy Council decision has been considered in two Indian cases, one decided by the High Court of Calcutta and the other by the High Court of Patna. In the Calcutta decision, In re : Ballay Chand Serowgee (A I R 1923 Cal. 703), the Privy Council decision was distinguished on the ground that what was held in that case was that the question of the debtor's misconduct should be dealt with at the time when the debtor's application for discharge comes up before the Court. In the Patna case, Rajendra Prasad Tewari v. Nageshwar Upadhya and others (A I R 1938 Pat. 368), the view was taken that the Privy Council decision was inapplicable to the Provincial Insolvency Act, 1920, as that decision rested on the language of the old Act, which was brought on the assumption that nobody would apply to be declared insolvent unless he were incapable of paying his debts, unlike the present, when a large proportion of the applications in insolvency are made by the debtor themselves for the purpose of evading payment of debts.

5. In my view, the power to refuse, or to annul, djudication if the petition for adjudication amounts to an abuse,, of the process of the Court is inherent in Courts. The Calcutta High Court held in Malchand v. Gopal Chandra Ghosal (I L R 44 Cal. 899), that it was an abuse of the process of the Court for the debtors to apply for adjudication on the same facts and debt on which a previous adjudication had been made, which was later annulled, and that, consequently, adjudication obtained on the second application should be annulled. In another case, referred to above, that is, In re : Ballav Chand Serowgee, the debtor's petition was treated as an abuse of the process of the Court as the petition had been brought on the facts and materials on which a previous order of adjudication had been made, which order was subsequently annulled due to the debtor's failure to apply for discharge within the prescribed time. The Patna High Court held in Bindeshri Prasad v. Biso Singh (A I R 1937 Pat. 62), that in annulment proceedings the honesty and bona fides of the debtor in making the application for adjudication should be investigated. In another decision, Rajendra Prasad Tewara v. Nageshwar Upedhya, the same Court held the debtor's petition for adjudication to amount to abuse of the process of the Court :and annulled the order of adjudication on the ground that the debtor had included in his petition fictitious debts and had transferred a considerable portion of his property by sham transactions of sale. In a Madras decision, Alamelumangstha yarammal v. T. S. Balusami Chetti (A I R 1928 Mad. 394), the debtor's petition for adjudication was held to be abuse of the process of the Court as the debtor, when making this petition, was not unable to pay her debts and accordingly the order of annulment made on the original side was maintained in appal. Phillips, Mg., C. J. observed that the insolvent's petition "was not for any of the purposes for which the insolvency law was created and it is consequently an abuse of the process of the Court in that it obtained the jurisdiction of the Court "by a false declaration", and further, that "the Court certainly ought not to have made the order of adjudication and is consequently bound to annul that order on proof that the petitioner was not entitled to present the petition". This decision was followed by the Madras High Court in R. Viswanatha Chetty v. Official Assignee of Madras (A I R 1930 Mad. 544). In re: Painter (Ex parte : Painter), relied on by Mr. G. Raymond, it was assumed that the Courts were competent to annul adjudication on the ground of abuse of the process of the Court. Kennedy, J. specially observed that there may be cases in which the debtor's object in presenting a petition was so distinctly foreign to the purposes of the Bankruptcy Act, that the petition would be a mere abuse of the process of the Court. The order of adjudication in this case was, however, maintained on the ground that the only asset of the debtor was an inalienable pension. In an earlier English decision, In re : Bond ((1888) 21 Q B 17), a joint petition of two debtors, who were neither partners nor joint traders, was held to be an abuse of the process of the Court. In re : Betts (Ex parte : Official Receiver) ((1901) 2 K B 39), a petition for adjudication was treated as abuse of the process of the Court on the ground that the debtor had made this petition with the intention of evading committal orders made against him upon judgment summonses, though he had previously, at short intervals, and with the same object, presented two other bankruptcy petitions under which he was still an undischarged bankrupt. It would thus be seen that the Courts, both in England and in this sub‑continent, have, in general, accepted the ground of "abuse of the process of the Court" as a relevant consideration for refusing or annulling an adjudication. The Privy Council decision in Chhatrapat Singh Dugar v. Kharag Singh Lachmiram, may be distinguished on the ground that it rested on the language of the old Provincial Insolvency Act and that it had been found that the debtor was, in fact, unable to pay his debts. Likewise, the effect of the two Lahore decisions, that is, Kaka v. Nandoo and others and Sadhu Ram v. Kishori Lal, which are under the Provincial Insolvency Act, 1920, can at best be confined to cases where the material before the Court establishes the debtor's inability to pay his debts.

6. The matter before me has come under the Insolvency (Karachi Division and Dacca) Act, 1909, which in language is quite different from the old Provincial Insolvency Act. Under section 15 of the Act, the Court "may" make an order of adjudication. The Court has thus a discretion to make or not to make such order. An adjudication may be refused, or annulled, if the petition in this behalf amounts to an abuse of the process of the Court or, even if there is no misconduct on the debtor's part, the debtor fails to prove that he is unable to pay his debts. If an adjudication has been made, and if on subsequent investigation it is found that the debtor was not unable to pay his debts when be presented his petition, then the adjudication may be annulled under the first limb of section 21 of the Act, which provides that an adjudication may be annulled if in the opinion of the Court the debtor ought not to have been adjudged insolvent. In the Madras decision in Alamelumangsthayarammal v. T. S. Balusami Chetti, it was assumed that one of the pre‑requisites to make an order of adjudication is the debtor's inability to pay his debts. This view was reiterated in the subsequent decision in R. Viswanatha Chetty v. Offcial Assigne of Madras. This view has also prevailed in the Patna High Court See Bindeshari Prasad v. Biso Singh and Rajendra Prasad Tewari v. Nageshwa, Upadhya and others. In an earlier decision, Ganesh Lal Sarawgh v. Sanehi Ram and A liar Ram, the same Court held that an order of adjudication should be made on the debtor's petition only if the Court was satisfied that the statements made in the petition, which would include the statement with regard to the debtor's inability to pay his debts, were true. In the English cases also, which have been referred to above, the assumption was that the precondition for making the order of adjudication on the debtor's petition is his inability to pay his debts. Thus, In re Harry Dunn (Ex parte : The Official Receiver v. Harry Dunn), Denning L. J. (as he then was) observed that when making the petition the debtor should "honestly" believe on reasonable grounds that he was unable to pay his debts. Evershed M. R., in the same case, agreed with the view that in judging whether an order of adjudication ought to have been made, the Court is entitled to have regard to the actual state of affairs on the date of the order, and that, of course, may appear from the evidence subsequently filed.

7. It is now to be considered whether the debtor in this case ought not to have been adjudged insolvent, or whether the order of adjudication was obtained by the debtor by some act which amounts to abuse of the process of the Court. In this connection, it should be noted that the two creditors were immature young men when they were made to endorse the Government Promissory Notes of Rs. 1,00,000 by way of security for the overdrafts obtained in the account opened by the creditors and the debtor with Habib Bank. The account is shown in the bank as partnership between these persons, and this position is borne out fully by Exh.

7. This document contains the decisions of the elders of the Community given on 18th January 1954 and is in the form of an agreement signed not only by these elders, but also by the debtor and the two creditors. It is held in this decision, and this decision is accepted by the debtor as he was a signatory thereto, that the creditors had not interest in the account opened with the Habib Bank and that the overdraft granted in this account was used by the debtor himself. It turned out in the public examination 'of the debtor that he had also opened a personal account, in his own name with the United Bank Ltd. The account with the Habib Bank was operated only by the debtor, who used to draw bearer cheques thereon for various amounts payable to himself in cash. Copies of the statement of account of Habib Bank and United Bank have been brought on record. The examination of these accounts shows that the debtor would draw various amounts from the Habib Bank and deposit the same in his own account with the United Bank Ltd., and then again draw cheques on this latter account, the cheques being again bearer cheques payable to himself. In this way the debtor withdrew Rs. 1,71,000 from Habib Bank and deposited Rs. 1,49,000 in his personal account with the United Bank Ltd. It has been stated above that the debtor has paid Rs. 50,000 to the creditors. The balance of Rs. 50,000 is claimed by the debtor to be the loss of the firm arising from certain debts becoming irrevocable. According to the debtor, the over‑draft with the Habib Bank was used only for the business of money lending. In other words, the sum of Rs. 50,000 which remains unpaid, is due from various persons to whom the debtor advanced loans. In spite of my repeated enquiries, the debtor failed to give the name and necessary particulars of even a single person from whom the loan advanced by him is still recoverable. The debtor's answer was that the names of such persons are in the account books which are with the creditors. This, in my opinion, is a false plea. No account books seem to have at all been maintained and no such books appear to have been handed over to the creditors. The elders of the community categorically held that the creditors had no interest in the account with Habib Bank, in which overdraft of Rs. 1,00,000 had been obtained on the pledge of the creditors' securities, and that this overdraft was used by the debtor himself. The debtor accepted the correctness of this decision, as he is a signatory to the document, Exh. 7, in which this decision is incorporated. Even if it be assumed that some accounts were maintained, which have now been handed over to the creditors, I find it difficult to believe that the debtor would not remember the name of any single person from whom the loan advanced by him is still due and payable. Mr. G. Raymond suggested that the names of these debtors may appear on the cheques drawn on the Habib Bank and the United Bank. On this suggestion I was inclined, in the first instance, to summon these cheques or to direct further examination of the debtor with reference thereto. But then, on my enquiry, the debtor admitted in Court that the cheques drawn on these banks were bearer cheques, payable to the debtor himself. Thus, these cheques would not show as to whom moneys were lent by the debtor from time to time out of the overdraft obtained from the Habib Bank. The debtor has also not satisfactorily explained as to why he found it necessary to open a separ4tg acrroutlt with the United Bank on his own name, and to deposit in this account huge amounts drawn by him from the joint account maintained at the Habib Bank. His answer in the public examination was only this that‑ the office of the Habib Bank was at a distance of 100 yards, whereas United Bank was only 20 yards, from the p'ace where the partnership business was allegedly carried on. It may here be stated that initially, in his public examination, the debtor denied the amounts drawn from Habib Bank were deposited in his personal account in the United Bank. But when he was confronted with the statement of account from this Bank, he had to admit that he did, very frequently, drew various amounts from the Habib Bank, and deposited the same in his personal account with the United Bank. The document, Exh. 7, and the statement made by the debtor in his public examination, raise a very important question, that is, what has been done to the sum of Rs. 50,000 which still remains to be paid to the creditors. The failure of the debtor to give the names and the particulars of the persons to whom loans have been alleged to have been made, and his conduct in regularly withdrawing various amounts from the joint account and depositing the same in his own personal account would not lead to the inference which is a reasonable inference in the circumstances of this case, that the debtor has concealed this sum of Rs. 50,

000. This inference is further strengthened by the finding of the Official Assignee that the debtor, notwithstanding the order of adjudication made on his own petition, carried on business in crude oil. The Official Assignee seized three drums of crude oil from the house of the debtor's sister, who herself laid no claim thereto, and these drums were ultimately sold for Rs. 2,392.75, which amount is still in the hands of the Official Assignee. Thus, the material on record shows that the debtor has defrauded the creditors to the extent of Rs. 50,000, which amount, there is strong reason to believe, he has kept under concealment, and that notwithstanding the order of adjudication, the debtor has been carrying on business, presumably with this concealed money. Can it, therefore, be said that on the date the order of adjudication was made the debtor was unable to pay his debts, that is, the sum of Rs. 50,000 which he owed to the two creditors? I am of the view that if a debtor is found to have concealed moneys, which are sufficient to discharge his debts, he cannot then be said to be unable to pay his debts, and it being so, the debtor in this case ought not to have been adjudged insolvent. Hence the order of adjudication can be annulled on the ground that the debtor has failed to prove that he was unable to pay his debts on the date on which he obtained the order of adjudication on his own petition. Since the material on record suggests that the debtor has concealed moneys which would otherwise have satisfied the debt which he owes to the two creditors, the debtor's petition for adjudication should be held as distinctly foreign to the purposes of the insolvency law. The intention with which this petition was moved was obviously to save the debtor from arrest and detention in civil prison in the execution proceedings taken out by the creditors, and to further save himself from liability on the cheques which be had given to the creditors and which still remained unpaid. This is not the purpose of the Insolvency Acts and, therefore, the debtor's petition can, with abundant justification, be treated as an act amounting to abuse of the process of the Court. Thus, the order of adjudication is liable to be annulled both on the ground that the debtor's petition in this behalf was an abuse of the process of the Court, and that on the date this order was made the debtor could not be said to be unable to pay his debts. For these reasons, I would accept the creditors' application and annul the order of adjudication made on 14‑7‑1958. In view of this annulment, the debtor's petition for interim protection under section 25 of the Insolvency (Karachi Division and Dacca) Act, 1909 is also rejected and the interim protection granted to him is withdrawn. The debtor's own petition for discharge under section 38 of the Act becomes infructuous in view of this order and the amount lying with the official assignee would vest in him for the benefit of the creditors. K. B. A. Petition accepted. Order accordingly.