Procedure to be followed by Court when Insolvency petition is filed

Madhya Pradesh High Court, Indore Judgments


Before :- R. C. Lahoti, J.
Civil Revision 71 of 1990. D/d. 12.8.1991.

Radheshyam Agrawal - Applicant
Hariom Trading Co. and others - Non-applicants.

For the Petitioner :- Mr. N. K. Jain, Advocate
For the Respondent :- Mr. N. K. Modi, Advocate.

R. C. Lahoti, J. - The debtor-petitioner has come up in revision aggrieved by the order dated 26-3-90 passed by the Insolvency Court directing a notice under Section 19(2) of the Provincial Insolvency Act, 1920 (hereinafter referred to as the 'Act', for short) to be published in local newspapers and also served on other creditors who are not the petitioners.
2. The two creditors, non-petitioners Nos. 1 and 2 herein, filed a petition under Sections 6 and 9 of the Act seeking adjudication of the non-petitioners therein, as insolvents. The petition has been filed on 27-9-88. It alleges, inter alia, that on 20-7-88, the debtors displayed a notice outside their shop stating that they were not in a position to make payment to their creditor; that in order to defeat the claims of the creditors, the goods in trade have been removed from their shop to elsewhere; and that the debtors gave a false reply to the notice demanding payment of their debts issued by the petitioning creditors.
3. The alleged debtors are; the revision-petitioner, his wife and two sons. It appears from the statement of facts as made at the Bar that notice of the insolvency petition was served on the debtors Nos. 2, 3 and 4, but not on the debtor No. 1, who was away from Gwalior at the time of when the process server went to serve the notice. The insolvency Court initially proceeded ex parte against the debtor No. 1 (the revision-petitioner), but then he made appearance before the insolvency Court seeking setting aside of the ex parte order and further complaining the various averments made in the insolvency petition were false and the petition was not maintainable.
4. From the long drawn arguments advanced before this Court, the sum and substance of the submissions made by the learned counsel for the revision- petitioner can be crystallised in the following four points :-
    (i) that sub-sections (2) and (3) of Section 19 of the Act have different applicability; while sub-section (2) applies to an insolvency petition made by a debtor; sub-section (3) applies to an insolvency petition made by a creditor; the creditors being the petitioners before the Insolvency Court, notice to none else except the debtor was warranted;
    (ii) that the debtor was not served with any notice of the insolvency petition in the manner contemplated by Order 5 of the Civil Procedure Code and hence all the proceedings including the impugned order before the Insolvency Court were without jurisdiction;
    (iii) that sub-section (2) of Section 19 does not prescribe any procedure and hence the only manner in which a notice may be issued could be a personal notice to the debtor in the manner contemplated by Order 5, Civil Procedure Code and not a publication in the local newspaper;
    (iv) that insolvency petition cannot be said to have been admitted so far by Insolvency Court; the term 'admission' of petition having not been defined, it would mean, an order of admission made by the Court after due application of mind to the facts of the case on affording the debtor an opportunity of hearing, if he has made appearance and also on holding a summary inquiry, if maintainability of the petition or the entitlement of the creditor to move the petition was disputed.
It will be useful to examine each of the contention seriatim.
5. Point No. (i) :- Section 19 of the Act reads as under :-
    "19. Procedure on admission of petition :-
    (1) Where an insolvency petition is admitted, the Court shall make an order fixing a date for hearing the petition.
    (2) Notice of the order under sub-section (1) shall be given to creditors in such manner as may be prescribed.
    (3) Where the debtor is not the petitioner, notice of the order under sub-section (1) shall be served on him in the manner provided for the service of summons."
A bare reading of the provision does not lend any support to the contention of the learned counsel for the petitioner. It is difficult to spell out a scheme under-written Section 19 so as to read out applicability of sub-section (2) only to the insolvency petition by a debtor and to exclude its applicability to an insolvency petition by a creditor. On the contrary it is a writ large that having admitted the insolvency petition, the Court has to make an order fixing a date for hearing the petition, without regard to the fact whether the petitioner is a creditor or a debtor. Sub-section (2) is linked with sub-section (1) and speaks of notice being given to creditors. Sub-section (3) is an addage requiring notice to be served on a debtor obviously when the debtor himself is not the petitioner. If debtor is petitioner notice to debtor of his own petition will be an empty ritual or wanton formality.
6. The view so taken finds support from Nihchaldas Goverdhendas v. Phoolchand Satyanarayan, 1986 (2) MPWN 92 cited by the learned counsel for the petitioner. In a petition by a creditor, failure to serve notices under Section 19 upon other creditors was held to be breach of a mandatory provision within the order of adjudication.
7. The learned counsel for the creditors has relied on a number of decisions to support the impugned order. A Division Bench of Rajasthan High Court in Punjab National Bank Ltd. v. M/s. Jethmal Danmal, AIR 1958 Rajasthan 223 has held :-
    "Section 19(2) applies to petitions both by creditors and by debtors and the notice has to be made in the manner prescribed in Rule 423 of the General Rules (Civil) framed by the High Court of Rajasthan. This means that whether the petition is by a creditor or by a debtor, general notice as prescribed by that rule must always be given. Specific notice to individual creditors will only be given where the names and addresses of the individual creditors are known from any part of the petition."
The Division Bench has also stated the object underlying the provision in the following words (at page Raj 225 of AIR 1958) :-
    "On general principles, we may point out that a decision in an insolvency matter being a decision in rem, affect not only the parties before the Court, but all those who are creditors of the insolvent and who meddle with his property. That seems to be the reason why, even where the petition for insolvency is by a debtor, a general notice is prescribed by the Rules of the High Court in addition to specific notice to creditor's name in the application.
    The idea seems to be that if for some reason - whether deliberately or by inadvertence - some creditor is left out, there should be general notice to all that a certain person has applied for insolvency, so that if anyone is interested, he may appear in Court and contest it.
    It seems to us that in the case of an application by a creditor, where the law does not make it incumbent upon him to give a list of all other creditors, it is all the more necessary that a general notice should be issued so that all the creditors, who may be interested in the debtor against whom an application for insolvency is made, may, if they so desire, appear in Court and submit their objections, if any, to the person being declared insolvent."
8. The learned counsel for the debtor has tried to distinguish the abovesaid ruling of the Division Bench by submitting that the law laid down therein has to be read in the light of the Rules framed by the Rajasthan High Court which have no applicability to the case because no Rules have been framed by the High Court of Madhya Pradesh prescribing the manner of notice. As will be noticed a little later, the learned counsel is mistaken. Rules or no rules, the interpretation placed by the Rajasthan High Court on Section 19(2) is correct and does not depend on the existence of the rules for its efficacy.
9. Other High Court have taken a similar view. Reference may be made to :
    (i) Sheo Shanker Lal v. Debi Dayal, AIR 1945 Oudh 319; (ii) S. R. Darrah v. Fazal Ahmad, AIR 1926 Lahore 360; (iii) Nachiappa Chetty v. Thangavelu Chetty, AIR 1917 Madras 203.
10. The first contention of the learned counsel, therefore, fails. It is held that Section 19(2) of the Act applies to every insolvency petition whether by a creditor or by a debtor.
11. Point No. (ii) :- It is true that while dealing with the proceedings under the Act, the provisions of the Civil Procedure Code would be applicable as far as practicable, meaning thereby that Order 5 would apply to service of notices under the Act. The learned counsel for the debtor submits that he was not served with the summons in the prescribed form nor with a copy of the order of the Court admitting the petition against him. The fact remains that the case proceeded initially ex parte against the revision-petitioner. Copy of the notice issued on 9-1-89 appointing date of hearing '27-2-89' states that the petition under Sections 6 and 9 of the Act was filed and 27-2-1989 was appointed for hearing. That, in substance, communicated the order admitting the petition. Having secured setting aside of the ex parte order, the revision-petitioner started participating at the proceedings. The learned Counsel for the debtor did not admit during the course of hearing that copy of insolvency petition was made available to him. He must be attributed with the knowledge that the insolvency petition had been admitted for hearing and that is why a date of hearing contemplated by Section 19(1) of the Act was fixed. If the argument of the learned counsel was to be accepted, it would mean that in all cases where ex parte proceedings are set aside, a defendant must be served afresh with a copy of the plaint with summons in the prescribed pro forma and a debtor must be served afresh with a copy of the insolvency petition and the order of the Court. That would be a mere formality. Even otherwise, the debtor shall have to show prejudice even where there is absence of the requisite notice under Section 19 of the Act and till then the validity of the proceedings would not be adversely affected. (See Jhanda Singh v. Receiver, Insolvents' Estate, Amritsar, AIR 1935 Lahore 412).
12. The second contention also, therefore, fails.
13. Point No. (iii) :- The High Court of Nagpur, predecessor of the High Court of Madhya Pradesh, has framed Provincial Insolvency Rules under Section 79 of the Act (See Provincial Insolvency Act, Commentary by K. Krishnamurthi and R. Mathrubhutham, MLJ Madras publication, first Edition, at page 725). Rules 5 and 6 read as under :-
    "Where publication of any notice or other matter is required by the Act to be made in an Official Gazette, a memorandum referring to and giving the date on which advertisement appeared shall be filed with the record, and noted in the order sheet."
    6. (1) The Court may direct that notice of an order fixing the date of hearing of a petition under sub-section (2) of Section 19 of the Act shall be published at the place where the debtor usually carries on business or, if he does not carry on any business, at the place where he ordinarily resides, and also in such local newspaper or newspapers as it thinks fit. A copy of the notice shall also be forwarded by registered post to each creditor to the address given in the petition, or served on the creditor in the manner prescribed for the service of a summons as the Court may think fit."
    (ii) The same procedure shall be followed in respect of notices of the date for consideration of a proposal for composition or scheme of arrangement under sub-section (1) of Section 38."
14. The contention that the manner of notice has not been prescribed is misconceived. The High Court of Nagpur being the predecessor of High Court of Madhya Pradesh, the Rules framed by it shall continue to hold good and apply unless repealed or superseded. Personal notices to the creditors and publication of general notice, also in local newspaper, are all contemplated by Rules.
15. The third contention also fails.
16. Point No. (iv) :- The last contention of the learned counsel for the petitioner has been argued with not the least vigour. However, no authority has been cited at the Bar and the learned counsel for the petitioner frankly conceded that he could not lay hand on any authority which could support the interpretation which he was proposing to place on the term 'admission' and 'admit' as occurring in Sections 18 and 19 of the Act.
17. Learned Author Mulla in his celebrated work on the law of Insolvency (Tagore Law Lectures, 3rd Edition, 1977) observed at page 146, that the Rules as to admission of plaint laid down in Order 4, Rule 1 and Order 7, Rule 9 of the Civil Procedure Code are the Rules referable. Under Order 4, Rule 1 suit commences by presenting a plaint to the Court or to the authorised officer and it being entered in the register of civil suits under Rule 2. The plaint having been presented and found to be in order prima facie, the Court has to appoint time/date for filing the requisite copies thereof for service on the defendant. The stage soon before such appointment of a date is the stage of admission of plaint. The Civil Procedure Code does not contemplate any reasoned order being passed or a summary or regular hearing taking place for admitting the plaint. The scheme of the Code shows that 'admission of plaint' is an inference to be drawn from the order of the Court appointing a date for hearing, after presentation of plaint. If a plaint is not rejected or returned under Rules 10 and 11 of Order 7, Civil Procedure Code it is admitted. Thus the stage of admission of plaint would certainly succeed its presentation and institution and would necessarily follow the absence of return or rejection thereof.
18. Rule 38 of Madhya Pradesh Civil Courts Rules, 1961 provides for scrutiny of the plaint by the officer receiving it, so as to find out :
    (i) Whether the plaint has been properly stamped in accordance with the valuation put upon it.
    (ii) Whether it has been properly signed and verified.
    (iii) Whether it complies with the requirements of Order 7, Rules 1 to 8.
    (iv) Whether in the case of recovery of land it sets out sufficient specification of the land claimed, i.e., if an entire plot or field, to which a separate survey number has been assigned is claimed, whether the plaint states that survey number and its area or, if a portion only of such a survey number is claimed whether the plaint defines specifically the area claimed and its position and boundaries are clearly shown in the map filed with the plaint.
    (v) Whether it is accompanied by the necessary copies of plaint and process fees.
    (vi) Whether the documents attached to the plaint (if any) are accompanied by a list in the prescribed form.
    (vii) Whether it is accompanied by plaintiff's registered address as required by Order 7, Rule 19.
    (viii) Whether in the case of minor plaintiff and defendants the requirements of Order 32, Rules 1 and 3, have been complied with and the necessary application supported by an affidavit verifying the fitness of the proposed guardian ad litem of the minor defendant(s) has been filed.
    (ix) Whether the suit is within the pecuniary and territorial jurisdiction of the Court.
    (x) Whether the claim is apparently within time.
    (xi) Whether the power of attorney has been properly accepted and endorsed by the pleader and whether in the case of illiterate executants it has been attested as required by Rule 9-A.
That having been done the plaint is to be transmitted to the Court concerned. The officer may also refer the plaint to the Court along with his opinion for its return or rejection for any reason. Vide Rule 41 a plaint on admission shall be registered in the register of civil suits. The scheme of the Rules also indicates that if in the opinion of the Court the plaint is not liable to be returned or rejected, it is admitted and that is why it is entered in the register of civil suits. Then issue of process to the defendant follows. The Civil Procedure Code and the Civil Court Rules do not contemplate any hearing being afforded to the defendant in the matter of admission of the plaint. Ordinarily and primarily that is a matter between the plaintiff and the Court.
19. The Civil Procedure Code (Amendment) Act, 1976 for the first time introduced Section 148-A in the body of the Code and thereby gave a right to the adverse party of being heard at such stages at which he would not ordinarily or otherwise have had an opportunity of being heard.
20. So would be the case with an insolvency petition. Section 6 defines the Acts of Insolvency. Sections 9 and 10 respectively lay down conditions on which a creditor or a debtor may petition, Section 11 speaks of the Courts which would have the jurisdiction. Sections 12 and 13 provide for certification and the contents of the petition. All that can be expected of an Insolvency Court is that for the purpose of admitting the petition and directing notices to be issued under Section 19, it would apply its mind to find out whether on its face, the insolvency petition satisfies the requirements of these several provisions referred to hereinabove. If it does not, the petition will be rejected or returned. If not rejected nor returned, the 'admission' would follow. The order of the Court fixing a date for hearing of the petition would be an order 'admitting the insolvency petition'. Then would come the stage for noticing the debtor as contemplated by sub-section (3) of Section 19 of the Act. Really speaking till that stage, the debtor does not come into picture at all. The question of hearing him, muchless of holding an enquiry for the purpose of passing an order of admission of petition, as suggested by the learned counsel for the petitioner, does not arise at all. The only stage where the debtor would have an opportunity of being heard and participating at the hearing, is one contemplated by Section 24 of the Act.
21. It will be useful to notice the following observations of the Madras High Court in K. Sambasiva v. Official Receiver, West Tanjore, AIR 1942 Madras 88 :-
    "On the presentation of the insolvency petition on 3rd July the Court ordered 'check and file emergently'. It was checked and was filed, and on the same day the Court further ordered that publication charges should be deposited by 7th July. On 7th July notice and publication were ordered :
    Held that the date of admission was 3rd July and not the 7th July. No doubt the order to issue notice may constitute the act of admission in many cases but it cannot be a universal rule of law."
The Madras High Court referred to its earlier decision in Narsimha, AIR 1940 Madras 624 wherein it was held that the order to issue notice under Section 19 constituted an act of 'admission'.
22. Incidentally it may be stated that Sections 20 to 24 of the Act also use the phrase 'an order admitting the petition'.
Simultaneously with that the Court may appoint an interim receiver or pass other specified orders. If the Insolvency Court passes any of the orders contemplated by Sections 20 to 24 of the Act, that order itself would be an order 'admitting the insolvency petition'. (See, Agar Chand v. Prithvi Singh, AIR 1936 Lahore 885).
23. Last, but not the least, a Division Bench decision of Gujarat High Court (report not available) point noted at No. 5 below Section 18 of the Provincial Insolvency Act, 1920 (AIR Manual, IV Edition, Vol. 30, at page 61) squarely runs counter to and repels the contention of the learned counsel for the debtor. The ratio reads-
    "The procedure laid down in the Civil Procedure Code (1908) with respect to the admission of plaints has got to be followed in case of insolvency petitions. For purpose of admission of plaint, no preliminary hearing is envisaged by Civil Procedure Code and it would be, therefore, too much to say, that in all cases of insolvency petitions, a notice for a preliminary hearing is a matter of obligation for the Court. (1978) 19 Guj LR 172 (174) (DB)."
24. The last contention of the learned counsel for the petitioner also fails.
25. It has been contended that if an insolvency petition by a creditor is entertained against a debtor and directed to be published, it may cause tremendous harm to the reputation and business of the debtor and this Court must, therefore, hold that an inquiry in the presence of the debtor must precede an order under Section 19 of the Act. Suffice it to say that when the language of the law is clear, the Court has to interpret the law as it is written and not as it ought to have been written. This Court cannot supplement its own reasons based on propriety and thereby legislate and read something in the law which it is not there. In Crawford v. Spooner, 4 MIA 179 at p. 187, the Privy Council said :-
    "We cannot aid the Legislature's defective phrasing of an Act. We cannot add or mend, any by construction make up deficiencies which are left there."
The Apex Court said in State of Kerala v. Mathai Verghese, AIR 1987 Supreme Court 33 :-
    ". . . . . . the Court cannot reframe the legislation for the very good reason that it has no power to legislate."
26. Strong reliance has been placed by the learned counsel for the revision- petitioner on a single Bench decision of Gujarat High Court in Mohanlal Premjibhai Thakkar v. Shah Atulkumar Kantilal, AIR 1984 Gujarat 152 probably the only authority which appears to support his one of the contentions.
26.1 In Mohanlal's case (supra), as the facts set out in the report indicate, the question arising for decising for decision was whether the insolvency Court has any discretion to issue a notice to the opponent debtors after admitting the insolvency petition and before directing public notice to issue. The most significant fact was that the debtors had entered a caveat and served copy thereof on one of the petitioner/Creditors prior to filing of the insolvency petition and yet without hearing the opponent debtors, the trial Court had directed a public notice to issue. On the flaw being pointed out by the debtors, the trial Court directed its own order of public notice to be stayed so as to enable the hearing being afforded to the debtor. The creditors preferred an appeal. The Appeal Judge set aside the order of the trial Court observing that the trial Court had given hearing to both the sides and it was not necessary, therefore, to stay the order of public notice. It was pointed out to the High Court, in a revision preferred by the debtors, that the trial Court had not till then considered whether there was a prima facie case for issuing public notice or not which consideration the trial Court had reserved for a later occasion and it had only decided the preliminary question whether the debtors were entitled to any hearing before issuing public notice or not. The reasoning of the appellate Judge that the trial Court had heard the debtors on the question of prima facie case and necessity of issuing public notice, was contrary to the record and hence unsustainable under any circumstances. The learned counsel for the creditors did not make any attempt to support the judgment of the lower appellate Court on the point.
26.2 Vide para 6 in Mohanlal's case (supra) reference was made to Division Bench decision in Hasmukh Engineering Works v. Babubhai Chhotalal Amin, (1978) 19 Guj LR 172, referred to in para 23 of this order. The learned single Judge followed the Division Bench ruling that there was no such obligation on the trial Court to hear opponents-debtors before issuing public notice under Section 19(1) of the Act. The following observation from the Division Bench decision has been quoted by the learned single Judge :-
    "We are not in agreement with the observation of the learned trial Judge that these provisions specifically negative the Court's power to hear the debtor before issuing a public notice, as has been thought by the learned Judge. However, for want of anything contrary, express or implied, in the language of Section 19 of the Act, we say that the concerned Court of insolvency may, in its discretion, issue a notice to the concerned debtor and hear him and if the Court finds that the application prima facie does not make out any act of insolvency, it may not proceed with the matter further and in such cases it would not be necessary for the Court to issue a public notice contemplated."
26.3 The present case is thus apparently distinguishable from Mohanlal's case. Here the trial Court has not felt the necessity of issuing any notice to the debtor for the purpose of hearing whether a public notice should issue or not. There was no Caveat filed by the debtors affording them a right of hearing by reference to Section 148-A of Civil Procedure Code. Here the trial Court had not formed an opinion that issuance of a public notice was justified to be postponed until, the debtor was heard. Moreover, Mohanlal's case (supra) nowhere contemplates an inquiry, summary or detailed, being held in the presence of the debtor at the stage of Section 19 of the Act.
27. The residuary contention of the learned counsel for the debtor also fails.
28. To sum up :
    (i) It is not obligatory for the Insolvency Court to hear a debtor while admitting the insolvency petition filed by creditor and directing notices under Section 19 to be issued;
    (ii) The Insolvency Court may in its discretion issue a notice to the debtor and postpone the issuance of public notice and/or personal notice to other creditors, in a petition filed by creditor, if the Insolvency Court in its discretion feels the necessity of doing so or where the debtor has entered a Caveat under Section 148-A, C.P.C.;
    (iii) At the stage of admitting the insolvency petition and directing notices to be issued under Section 19(2) no inquiry, summary or detailed, by recording evidence, is contemplated; all that is contemplated is forming of a prima facie opinion by the Insolvency Court on preliminary questions such as whether the petition has been properly drawn up, signed and verified, whether it is within limitation, whether the Court has jurisdiction, whether the petition discloses entitlement of the petitioner to file a petition and C;
    (iv) Section 19(2) of the Act applies both to the petition by debtor and by creditor.
29. Though all the contentions raised by the learned counsel for the debtor/ revision-petitioner have failed, yet he deserves to be granted a marginal relief. A perusal of the record of the proceedings of the Insolvency Court shows that it has nowhere recorded an order as to its prima facie satisfaction of the points referred to in the preceding para. That has to be done now before the Court may issue notice to the creditors under Section 19(2) of the Act. Inasmuch as the debtors have already made appearance, it would be in the interest of justice, if the trial Court would hear them. However, that does not mean that the trial Court would embark upon an inquiry by recording evidence on the question of admission of the petition. It would only record its prima facie satisfaction after hearing both the parties on the question whether the petition as drawn up and as presented is liable to be admitted. On that opinion being recorded, which would tantamount to admission of the petition, notice under Section 19(2) would follow. By way of abundant caution it is made clear that there would be necessity of noticing the debtors afresh because they have already made appearance.
30. The revision is disposed of in terms indicated hereinabove and subject to the observations made in the body of the order. Parties are directed to bear their own costs. Both the parties are directed through their respective counsel to appear before the trial Court on 20-8-91. Let the records be despatched back posthaste along with a copy of this order.
Order accordingly.
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Geek Upd8 - Law Reporter: Procedure to be followed by Court when Insolvency petition is filed
Procedure to be followed by Court when Insolvency petition is filed
Provincial Insolvency Act, 1920, Section 19(2) - Insolvency petition - Requirement of notice of admission of petition to the creditors under Section 19(2) applies to every petition whether by creditor or debtor. Provincial Insolvency Act, 1920 Sections 19(1), 19(2) and 19(3) Insolvency petition - Requirement of notice under Section 19 (2) - Ex parte proceedings set aside - Service of copy of insolvency petition afresh and order of the Court on the debtor is not required - In the absence of service of such notice, if no prejudice is shown, the proceedings are not vitiated
Geek Upd8 - Law Reporter
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