Nirav Shaunak Choksi Vs The Official Assignee and Others <BR> Nishit Kishordas Mehta and Others Vs Sushila Harshad Choksi and Others

D.Y. Chandrachud, J.@mdashAdmit. By consent of the learned counsel and at their request, the Appeals are taken up for hearing and final disposal. The Appeals arise from a decision of a Learned Single Judge dated 21 November 2011 on two reports submitted by the Official Assignee in the insolvency proceedings under the Presidency Towns Insolvency Act 1909. The first appeal is by Nirav Shaunak Choksi, the grandson of the insolvent, the original Fourth Respondent to the proceedings before the Learned Single Judge. The second of those appeals is by the Petitioning Creditor who is represented by his legal heirs.

2. The insolvent was the owner of a building by the name of Choksi Villa at 63, R.A. Kidwai Road, Wadala, Mumbai. His grandson, the Appellant claims a tenancy through the insolvent, his grandfather, under an agreement purportedly of 18 March 1999 in respect of flats 7 and 8 aggregating to an area of 2300 sq. ft. comprised on the third floor of the building. The Official Assignee claimed that the tenancy agreement was sham and bogus. The Learned Single Judge declined to allow the reports submitted by the Official Assignee on the ground that the insolvency Court does not have jurisdiction to entertain proceedings against a stranger to the insolvency unless he submits to jurisdiction and in a situation where the Official Assignee claims not a paramount right, but a right similar to what the insolvent would have. The construction which has been placed by the Learned Single Judge on the provisions of Section 7 and Section 36 of the Presidency Towns Insolvency Act 1909 is that unless there was a voluntary submission to jurisdiction, the Court could not entertain a report by the Official Assignee. Since the Appellant who claims to be the tenant has since instituted a declaratory suit before the Small Causes Court, the Learned Single Judge clarified that if he is unable to obtain any interim orders before the Small Causes Court within eight weeks, he shall handover possession of the property to the Official Assignee within four weeks of the conclusion of the interlocutory proceedings before the said Court. The order of the Learned Single Judge is placed in appeal on the ground that having held that the Court had no jurisdiction to entertain such a proceeding, it was not open to the Learned Single Judge to direct the Appellant to handover possession unless a protective interim order is obtained from the Court of Small Causes. The second appeal by the Petitioning Creditor (now through his legal heirs) challenges the view of the Learned Single Judge that the Court in the exercise of its insolvency jurisdiction had no jurisdiction whatsoever to entertain the proceedings.

3. In the present case, the alleged tenancy agreement dated 18 March 1999 provides that the landlord who was the grandfather had granted the premises on a leave and licence basis for a period of five years with effect from 15 January 1999 to the grandson renewable from time to time at his option. The consideration for the tenancy is a monthly rent of Rs. 1,000/-. The tenant is authorised by the terms of the agreement to assign or mortgage the tenancy rights and to sublet or give on licence the premises without the consent of the landlord. The tenant has been allowed to bequeath the tenancy rights by way of testamentary disposition similarly without the consent of the landlord. The agreement contemplates that the tenant has paid to the landlord a sum of Rs. 2 lacs and that a further sum of Rs. 8 lacs would be paid as security deposit making an aggregate of Rs. 10 lacs which was refundable with interest at 12% per annum.

4. A summary suit was filed before this Court under Order 37 of the CPC which was decreed on 16 November 2005. A decree was also passed against the insolvent on 27 June 2006 in a suit filed on the Original Side of this Court¹. A warrant of attachment was issued in execution of the decree on 17 November 2006 inter alia including the ownership rights of the insolvent on the third floor of Choksi Villa and on 1 December 2006 the Sheriff executed the warrant. The act of insolvency was committed on 23 December 2006 by virtue of the warrant of attachment having continued for a period of more than 21 days. An insolvency petition was filed against the insolvent in which an order of adjudication was passed on 16 June 2009. The insolvent died on 25 February 2010. On 21 December 2010 the insolvency Court directed the heirs of the insolvent to file an affidavit disclosing the assets of the insolvent. On 21 June 2011 the insolvency Court took on record a copy of the alleged tenancy agreement dated 18 March 1999 and permitted the Official Assignee to take symbolic possession of the third floor while allowing him to make an inventory of the movables. The Official Assignee was directed to prepare a substantive report for submission to the Court. The further hearing was adjourned before the learned insolvency Court on 5 July 2011 as the heirs of the deceased insolvent were being examined by the Official Assignee. On 11 July 2011 the Appellant forwarded to the Official Assignee a cheque in the amount of Rs. 12,000/- for the rent payable from January 2010 to December 2010. The Official Assignee returned the cheque to the Appellant on 13 July 2011. On 26 July 2011 the Appellant filed a declaratory suit in the Small Causes Court against the Official Assignee and against the parents of the Appellant claiming tenancy.

5. The Official Assignee submitted a report² on 29 June 2011 seeking a declaration that the tenancy agreement was null and void and sought permission to obtain vacant possession of the premises. On 15 September 2011 the Official Assignee submitted another report³ seeking to amend the earlier report and to submit that the tenancy agreement was sham and bogus and was not binding on the Official Assignee.

6. The Learned Single Judge by the order which is impugned in these Appeals declined to entertain the request of the Official Assignee holding that there was a want of jurisdiction unless the Appellant who claims a tenancy had voluntarily submitted to the jurisdiction of the Court. However, as noted earlier directions were issued to the effect that unless the Appellant obtained interlocutory reliefs before the Court of Small Causes, he would be liable to handover possession to the Official Assignee. For convenience of reference, the grandson of the insolvent would be referred to as the Appellant. On the other hand, the Appellants in the companion appeal would be referred to as the Petitioning Creditor.

7. The submission which has been urged on behalf of the Petitioning Creditor in the appeal against the judgment of the Learned Single Judge on the issue of jurisdiction is that:

(i) If the construction which has been placed by the Learned Single Judge on the provisions of Section 7 and Section 36(5) is accepted, that would reduce the jurisdiction of the insolvency Court to a dead letter since it would preclude the Court from even examining, prima facie, as to whether a transaction which is set up is sham and bogus or fictitious;

(ii) If the document under which the claim of tenancy is made is sham and bogus, the jurisdiction of the insolvency Court would not stand excluded and the Court must necessarily have the power to determine in the first instance whether the transaction is genuine or whether as asserted by the Official Assignee the transaction is sham and bogus;

(iii) If the document is found to be genuine, then in such a case, the insolvency Court would be justified in relegating the Official Assignee to filing a suit. But to hold that in every case where any claim is set up by a third party, the Official Assignee must necessarily follow a dilatory remedy of a suit would defeat the object and purpose underlying Section 7 and Section 36 and must be eschewed;

(iv) In the present case, the Appellant has admitted that he is in possession of property of which the title vests in the insolvent and the expression ''belonging to'' has to be construed in that sense;

(v) The tenancy agreement would ex facie show that it is sham and bogus;

(vi) Several provisions of the agreement have been introduced bearing in mind the statutory provisions of the Maharashtra Rent Control Act of 1999 which came into force on 1 April 2000. The agreement is antedated. Besides, the agreement would ex facie indicate that whereas the rent agreed was Rs. 1,000/- per month, the security deposit of ten lakhs was liable to be returned with interest at 12% as a result of which the landlord who earned not more than Rs. 12,000/- per annum would be repaying an amount of Rs. 1.20 lacs per annum to his grandson. Apart from this, learned counsel submitted that he would be in a position to demonstrate that the alleged payments are in cash and the receipts which were sought to be relied upon by the Appellant are fraudulent and that the entire plea of tenancy was set up only to defeat the jurisdiction of the insolvency Court.

8. On the other hand, it has been urged on behalf of the grandson of the insolvent who is the Appellant in the companion appeal that:

(i) The provisions of Section 7 of the Act of 1909 came to be amended by Amending Act 19 of 1927 by incorporating a proviso. There is no such corresponding proviso in the provisions contained in Section 4 of the Provincial Insolvency Act 1920;

(ii) Under sub-section (5) of Section 36, the jurisdiction of the Court to direct a person to deliver to the Official Assignee property in his possession which belongs to the insolvent arises only where any such person admits on his examination that he is in possession of property belonging to the insolvent;

(iii) The admission in sub-section (5) of Section 36 must mean an admission not only in respect of the title of the insolvent, but also of the entitlement of the insolvent to lawful possession of the property which is in the possession of a third party;

(iv) In the present case, there was no submission to jurisdiction nor was there an admission that the insolvent was entitled to lawful possession of the property and in such an event it was not open to the insolvency Court to exercise jurisdiction u/s 36(5).

9. The basic question which falls for determination before the Court arises upon a construction of Section 7 and Section 36 of the Presidency Towns Insolvency Act 1909. Section 7 provides as follows:

7. Power of Court to decide all questions arising in insolvency.-Subject to the provisions of this Act, the Court shall have full power to decide all questions of priorities, and all other questions whatsoever, whether of law or fact, which may arise in any case of insolvency coming within the cognizance of the Court, or which the Court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property in any such case:

Provided that, unless all the parties otherwise agree, the power hereby given shall, for the purpose of deciding any matter arising u/s 36, be exercised only in the manner and to the extent provided in that section.

10. u/s 7 the Court which exercises jurisdiction under the Act is entrusted with the power to decide "all questions of priorities, and all other questions whatsoever, whether of law or fact, which may arise in the case of insolvency". Three expressions in Section 7 would merit emphasis. The first is the use of the expression "full power"; the second is the "power to decide all questions of priorities"; and third is the "power to decide all other questions whatsoever, whether of law or fact". The intent of the legislature was therefore to confer jurisdiction on the insolvency Court in the most comprehensive terms to decide not merely questions of priorities that may arise as between the creditors of the insolvent, but all other questions which may arise of any kind and nature whatsoever, whether these constitute questions of law or fact. Finally, the concluding part of Section 7 empowers the Court to decide even those questions which the Court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property. The proviso to Section 7 was introduced by the Presidency Towns Insolvency (Amendment) Act 1927⁴. Under the proviso it came to be stipulated that unless all the parties otherwise agree, the power which is conferred upon the insolvency Court will be exercised only in the manner and to the extent provided in Section 36 for the purpose of deciding any matter which arises u/s 36. In order to understand the interplay between Section 7 and Section 36, a reference to Section 36 would be in order. Section 36(1) reads as follows:

36. Discovery of insolvent''s property-(1) The Court may, on the application of the official assignee or of any creditor who has proved his debt, at any time after an order of adjudication has been made, summon before it in such manner as may be prescribed the insolvent or any person known or suspected to have in his possession any property belonging to the insolvent, or supposed to be indebted to the insolvent, or any person whom the Court may deem capable of giving information respecting the insolvent, his dealings or property; and the Court may require any such person to produce any documents in his custody or power relating to the insolvent, his dealings or property.

11. Under sub-section (1) of Section 36 the power of the Court is invoked after an order of adjudication has been made. An application before the Court can be made either by the Official Assignee or by the creditor who has proved his debt. The Court is vested with the power to summon the insolvent or any other person (i) known or suspected to have in his possession any property belonging to the insolvent; or (ii) supposed to be indebted to the insolvent; or (iii) whom the Court may deem capable of giving information respecting the insolvent or his dealings or property. The Court is empowered to issue a direction to require such a person to produce documents in his custody or power relating to the insolvent, his dealings or property. The object of sub-section (1) of Section 36 is to enable the Court which exercises jurisdiction in insolvency to have full control over property belonging to the insolvent. In certain cases, the property may be in the possession of the insolvent himself. Alternately the property may be in the possession of a person other than the insolvent. The basic rationale is to enable the Court to have a full disclosure in regard to the insolvent, his dealings or property.

12. Sub-section (2) of Section 36 allows the Court to apprehend a person who despite being summoned refuses to come before the Court. Under sub-section (3) the Court may examine a person who is brought before it concerning the insolvent, his dealings or property. Sub-section (4) allows the Court to direct a person who admits that he is indebted to the insolvent, to order him to pay to the Official Assignee the amount in which he is indebted, in discharge of the debt. Sub-section (5) of Section 36 upon which the controversy in these Appeals turns provides as follows:

(5) If on his examination any such person admits that he has in his possession any property belonging to the insolvent, the Court may, on the application of the official assignee, order him to deliver to the official assignee that property, or any part thereof, at such time, in such manner and on such terms as to the Court may seem just,

13. Under sub-section (5) as it originally stood, the legislature had provided that if on the examination of any such person the Court is satisfied that he has in his possession property belonging to the insolvent, the Court may on the application of the Official Assignee order him to deliver that property or any part thereof at such time and in such manner and on such terms as to the Court may seem just. The opening words of sub-section (5) were substituted by Amending Act 19 of 1927. This was the same amending enactment by which the proviso was introduced into Section 7.

14. One of the early judgments of this Court construing the amended provisions of Section 36(5) was delivered by Davar J. in Haji Dada Nurmahomed and Bros. Vs. Ismail Karim, . The Learned Single Judge noted in his judgment that the provisions as they stood earlier of Section 36(5) were found to be arbitrary and to have led to a great deal of hardship and which led to the amendment of 1927. The Learned Single Judge held as follows:

Under the present amended section, under S. 36, one could get a deponent to admit possession of property, or one could find that the deponent was indebted to the insolvent, but no summary methods exist now of getting hold of the property by the Official Assignee unless and until the deponent admits that the property belongs to the insolvent. Therefore in every case, if the claim is contested, the Official Assignee is driven to a suit.

15. Chagla J. (as the Learned Chief Justice then was) revisited the provisions of Section 7 and Section 36 in the case of In Re: Balubhai Kallianchand, . The Learned Judge was of the view that the effect of the amendment was as follows:

The effect of the amendment is that when a person who is examined under S. 36 denies the claim of the Official Assignee with regard to any property in his possession, the Official Assignee can proceed against him only by way of suit unless he submits to the jurisdiction of the Insolvency Court.

16. At the same time, the view which was taken was that the new proviso applied only where there is an examination u/s 36. Where there was no examination u/s 36, it was held that the proviso would fairly not apply and the discretion of the Court would remain unfettered. In the exercise of the discretion in that case, Chagla J. held that the issues raised were important involving questions of the status of a minor and whether he was a member of a joint family and it was not right for the insolvency Court to drag strangers before it and to compel them to submit to determination of questions of title as between themselves and the Official Assignee. The Learned Judge held that it was not appropriate to decide these questions arising between the Official Assignee and the minor on the Notice of Motion.

17. A Full Bench of the Madras High Court construed the provisions of the proviso to Section Mrs. N. Lakshmi Vs. The Official Assignee of Madras, in the context of Section 36 in Mrs. N. Lakshmi Vs. The Official Assignee of Madras, . In the judgment delivered by Satyanarayan Rao, J. the provisions of Section 36 were construed in the context of the admission that is required to be made. The Learned Single Judge held as follows:

The Official Assignee is ignorant of the whereabouts of the properties of the insolvent and wishes to examine persons suspected of being in possession of the properties by examination under the section. The person so examined may admit title but deny possession, may admit title as well as possession, or may admit possession but not title. In all these cases, except in the case where he admits title and possession, the Court would have no jurisdiction to direct delivery of possession. The jurisdiction to direct delivery of possession is confined to cases where title and possession are admitted. What is this admission? The admission is that he has in his possession property belonging to the insolvent, not merely admission of possession, the title having been already admitted.

The view taken was that if the person admits that he is in possession of the insolvent''s property, then the Court has jurisdiction to direct delivery of possession.

18. Section 55 of the Presidency Towns Insolvency Act 1909 provides that any transfer of property, not being made before and in consideration of marriage, or made in favour of a purchaser or incumbrancer in good faith and for a valuable consideration shall, if the transferor is adjudged insolvent within two years after the date of the transfer, be void against the Official Assignee. In Babubhai and Others Vs. Gangji Jesang Cheda, . this provision was construed by Mrs. Justice Sujata Manohar (as the Learned Judge then was). In the course of the judgment the Learned Judge considered the submission that Section 7 of the Presidency Towns Insolvency Act 1909 was differently worded from the provisions of Section 4 of the Provincial Insolvency Act 1920 since under the latter Act questions of title were specifically brought within the purview of the determination of the insolvency Court. This submission was repelled on the ground that Section 7 of the Act of 1909 was couched in the widest possible terms to include all questions of fact or law of whatsoever nature and that must necessarily include questions of title. This view of the Learned Single Judge was approved in a subsequent decision of a Division Bench of this Court in Smt. Yogini Chandrakant Mehta Vs. The Official Assignee, High Court, Bombay and others, .. In that case, the husband who had been adjudged insolvent claimed to have transferred two flats by way of an unregistered document. The insolvent was the chairman of a co-operative society and had signed the share certificate himself in that capacity. The Division Bench while dismissing an appeal against an order of a Learned Single Judge holding that the transfer in favour of the Appellant was void ab initio and authorising the Official Assignee to take forcible and vacant possession of the flat held that Section 7 was of the widest amplitude empowering the insolvency Court with jurisdiction to decide the questions which arise before it and which was thought expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of the property. The Division Bench inter alia followed the view of Mrs. Justice Sujata Manohar in Babubhai v. Gangji Jesang Cheda (supra).

19. The issue which falls for consideration is as to whether the jurisdiction of the insolvency Court is ousted merely upon a third party asserting a claim to be in lawful possession of property belonging to the insolvent. In other words, and to put it differently would the jurisdiction of the insolvency Court be ousted merely on the assertion of a third party denying that he is in possession of property belonging to the insolvent? The submission which has been urged on behalf of the grandson of the insolvent in this appeal is that unless there is an admission of the nature which is adverted to in sub-section (5) of Section 36, the jurisdiction of the Court would stand ousted.

20. The consequence of the introduction of the proviso into Section 7 is that unless parties have otherwise agreed, the power which is conferred upon the insolvency Court by Section 7 can be exercised only in the manner and to the extent provided in Section 36 for the purpose of deciding any matter arising u/s 36. Sub-section (5) of Section 36 confers a discretionary jurisdiction on the Court to order a person to deliver to the Official Assignee property belonging to the insolvent, where he has admitted on his examination to be in possession of property which belongs to the insolvent. The construction which is to be placed on the proviso to Section 7 and upon Section 36(5) must, in our view, be purposive; one that would achieve the object which the legislature had in mind. The primary object which the legislature had in enacting the provisions of Section 7 is to confer on the insolvency Court jurisdiction in wide terms, already noted to decide all questions of priorities as well as all other questions whatsoever whether of law or fact which may arise in the course of the insolvency. The Court is similarly empowered to decide those questions which it deems expedient to decide for the purpose of doing complete justice or making a complete distribution of property in any such case. This object has to be read together with the underlying purpose of the proviso to Section 7 and Section 36(5). Neither of these provisions can, in our view, be read in isolation. Every part of the statute must be read in harmony. Neither provision can be construed to exclude the jurisdiction of the insolvency Court to decide in the first instance as to whether the transaction or the document upon which a third party claims is sham or bogus. To accept a contrary contention would mean that the jurisdiction of the insolvency Court even for the purpose of determining whether a document is sham or bogus would be ousted merely upon a person refusing to admit at his examination that he is in possession of property belonging to the insolvent. A construction which would defeat the object and purpose of the statute must be avoided. The Court must impart a meaning and content to the statutory provision which would make the statute workable.

21. The law distinguishes between a document or transaction which is genuine and one which is nominal and fictitious. A transaction which is bogus or sham has no existence in law and is void at its origin. Such a distinction has been made specifically in the context of the provisions of the Provincial Insolvency Act 1920 in a judgment of a Full Bench of this Court in Padamsi Premchand Vs. Laxman Vishnu Deshpande, . Section 53 provides for the avoidance of a voluntary transfer of property if the transferor is adjudged insolvent on a petition presented within two years after the date of the transfer. In the case before the Full Bench the Receiver had challenged three deeds of transfer on the ground that they were nominal and fictitious transactions and were not intended to transfer the real interest of the insolvent in the property. The receiver had contended that the transactions were not voidable but were void and were not valid in their inception and hence Section 53 had no application. Chagla, C.J. speaking for a Full Bench of this Court held that a transaction which is challenged on the ground of being fictitious or nominal would not fall within the purview of Section 53 and the insolvency Court has the jurisdiction to determine as to whether the transaction is fictitious and nominal. The Full Bench held as follows:

In this particular case the Receiver challenged these three deeds of transfer on the ground that they were nominal and fictitious transactions and that they were not intended to transfer the real interest of the insolvent in the properties. Therefore, on the allegation of the Receiver no title passed under these deeds of transfer to the transferee. These transactions were not voidable but they were void. These transactions were not valid in their inception and at no time did they transfer any title to the transferee. In our opinion transactions which are challenged on the ground of their being fictitious or nominal do not fall within the ambit of S. 53. If they do not fall within the ambit of S. 53, then S. 4 is wide enough to confer upon the Insolvency Court jurisdiction to decide whether these transactions were in fact nominal or fictitious. Unfortunately the trial Court did not raise the issue in the proper form. The issue it raised was: Has the Court jurisdiction on its insolvency side to set aside the trusts created? If the transaction is fictitious or nominal, it is not necessary to set it aside. It is not necessary to avoid it. It was void ab initio and all that the Receiver in insolvency might want is a mere declaration that in fact those transactions were void and of no effect. Therefore the issue that the trial Court should have considered and should have tried was whether these three transactions challenged by the Receiver were nominal and fictitious as alleged by him. If they were nominal and fictitious, then they did not all within the ambit of S. 53 and could be declared to be void under S. 4, Insolvency Act. If they were not fictitious and not nominal and they were real transactions although voluntary, then they would fall within the ambit of S. 53 and not having been challenged within the period required by that section could not be avoided by the Receiver in insolvency. The learned District Judge took the right view of the case and held that the trial Court had yet to find whether these transfers were real or fictitious, and it also took the view that if ultimately they were found to be fictitious, then the trial Court had jurisdiction beyond all question.

22. The principle which is embodied in the judgment of the Full Bench has a sound jurisprudential foundation. The principle can be gainfully utilized in imparting a meaningful construction to the provisions of the proviso to Section 7 and to Section 36(5). Consequently where the Official Assignee contends that a transaction which has been ostensibly entered into by the insolvent is nominal or fictitious or that it is sham and bogus, the jurisdiction of the insolvency Court to determine whether that is so would not be ousted. It is only to a transaction which is genuine, would the provisions of Section 36(5) be attracted. A transaction which is sham, fictitious, nominal or bogus is one which is void at its inception and which has no consequence in the eyes of law. A determination of this issue squarely falls within the jurisdiction of the insolvency Court.

23. The Learned Single Judge was, in our view, in error in declining to exercise jurisdiction on the ground that the Appellant was a stranger to the insolvency who had not submitted to its jurisdiction and on the ground that the Official Assignee was claiming only a right similar to what the insolvent would have had. The Official Assignee had specifically come before the Learned Single Judge with a case that the transaction between the insolvent and his grandson was entirely sham and bogus and the correctness of that submission had to be determined by the insolvency Court which would be acting within jurisdiction in doing so.

24. Though during the course of the hearing, Counsel appearing on behalf of the Petitioning Creditors has placed on the record his submissions on why the transaction must be regarded as sham and bogus, it would be inappropriate to render a determination on this issue in appeal since the Learned Single Judge has not done so on the view which he took on the lack of jurisdiction. Since we have come to the conclusion that the judgment of the Learned Single Judge on the point of jurisdiction is in error, we would have to remand the proceedings back to the Learned Single Judge for a re-examination of the report submitted by the Official Assignee. In the circumstances, we allow Appeal 167 of 2012 filed by the Petitioning Creditors and set aside the impugned order of the Learned Single Judge dated 21 November 2011. Official Assignee''s Reports 6 and 8 of 2011 shall in consequence be reheard by the Learned Single Judge. Appeal 89 of 2012 shall, in the circumstances, no longer survive and shall accordingly stand disposed of.

There shall be no order as to costs.

In order to enable the Appellant in Appeal 89 of 2012 to seek recourse to his remedies against this judgment before the Supreme Court, on the request of the learned counsel we continue the ad interim order of status quo which was granted on 1 February 2012 during the pendency of the Appeal for a period of four weeks from today.

¹. Suit 1774 of 2005

². Report 6 of 2011.

³. Report 8 of 2011

⁴. Act 19 of 1927.