Bombay High Court
M/S. Sanskar Gem Pvt. Ltd vs Raj Kantilal Shah on 5 December, 2023
Author: Abhay Ahuja
Bench: Abhay Ahuja
2023:BHC-OS:14494
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INSOLVENCY PETITION NO. 9 OF 2020
Re:
Raj Kantilal Shah, of Mumbai,
Indian Inhabitant, having address at
Gurukrupa, Ground Floor,
133, Kazi Sayed Street,
Mumbai 400 003 also having
Residential address at 13/5,
Rajhans, 6, Dongershi Road,
Walkeshwar, Mumbai-400 006. ... Debtor
Ex-parte:-
M/s Sanskar Gem Pvt. Ltd.
a Private Limited Company
incorporated under the provisions
of the Companies Act, 1956,
having its registered office at
204, Ambika Darshan Apartment,
Moti Khadiya Sheri, Sayedpura,
Surat, Gujarat ...Petitioning Creditor
Mr. Simil Purohit with Mr. Rubin Vakil, Mr. Manish Doshi i/b Vimadalal
& Co., for Petitioning Creditor.
Mr. M.P.S.Rao, Senior Advocate, a/w Mr. Darshit Jain, Mr. Sunil Patel i/
b Sunil & Co., for Judgment Debtor.
Ms. M. R. Parkar, Insolvency Registrar present.
CORAM : ABHAY AHUJA, J.
ORDER RESERVED ON : 7th NOVEMBER 2023
ORDER PRONOUNCED ON : 5th DECEMBER, 2023
KSG 1/37
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JUDGMENT :
1. This petition seeks an order of adjudication of insolvency by this
Court against the Debtor Raj Kantilal Shah of Mumbai.
2. It is not in dispute that the Judgment Debtor owes to the
Petitioner Rs. 21,37,78,446.52. Earlier, on 31 st March, 2016, the
Petitioning Creditor sent demand notice to Judgment Debtor. On 3 rd
May, 2016 interim reply was sent by advocate for Judgment Debtor to
the Petitioning Creditor. On 9th February, 2017, decree on admission
was passed in terms of the consent terms dated 9 th February, 2017 in
Summary Suit No.657 of 2016. As the Judgment Debtor failed to make
payment in terms of the said decree, Insolvency notice dated 16 th
October, 2018 was issued which was sealed on 4 th December, 2018. The
Insolvency notice was served upon the Judgment Debtor on 8 th
December, 2018 and an affidavit of service was filed in this regard. In
accordance with the said insolvency notice the Judgment Debtor had
35 days to make payment of the decretal amount. It is not in dispute
that, on 13th January, 2019, an act of Insolvency was committed by the
Judgment Debtor as he had failed to make payment within 35 days. On
14th January, 2019, Notice of Motion No.11 of 2019 was presented by
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the Judgment Debtor for setting aside the Insolvency notice. Thereafter,
within a period of 3 months from 14th January, 2019, on 23rd January
2019, this Petition on Lodging No. 1 of 2019, was filed by the
Petitioning Creditor for an order of adjudication of insolvency of the
Judgment Debtor. On 7th March, 2019 praecipe was filed by the
Petitioning Creditor in the Insolvency Registrar's office for numbering
the Petition. The Notice of Motion filed by the Judgment Debtor came
to be served upon the Petitioning Creditor on 9 th April, 2019. The
Insolvency Petition was served upon the advocates for the Judgment
Debtor on 11th April, 2019. After hearing the parties, the Notice of
Motion seeking to set aside the Insolvency notice was dismissed on 5 th
November, 2019 by passing the following order :-
"1. The above Notice of Motion is taken out by the
Applicant/Judgment Debtor for setting aside the Insolvency
Notice No.N/28 of 2018 dated 16th October, 2018 taken out
by the Petitioning Creditor, Affidavit in support is filed by
the Applicant/Judgment Debtor.
2. The Petitioning Creditor has taken out the above
Insolvency Notice pursuant to a consent decree dated 9 th
February, 2017 passed by this Court in Summary Suit
No.657 of 2016.
3. From the perusal of the Affidavit in support of the
Insolvency Notice, it appears that the Applicant is not
disputing the consent decree dated 9th February, 2017
passed by this Court. However, due to financial problems, he
is not in a position to pay the decretal amount to the
Petitioning Creditor. He submits that he owns properties at
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Surat which have a market value of Rs.10 to 12 Crores. He
further submits that he is in the process of selling/disposing
off his properties and the sale proceeds thereof, would be
utilized towards full and final satisfaction of the decretal
amount of the Petitioning Creditor. He submits that if the
Applicant is declared as Insolvent, no purpose would be
served.
4. On the last date of hearing, the learned Advocate for
the Applicant/Debtor had stated that the matter between
the parties would be settled. The decree in the Summary
Suit is of the year 2017. The Judgment Debtor is not even in
a position to pay decretal amount. I am not satisfied that the
Judgment Debtor has assets which have a market value of
Rs.10 to 12 Crores. I any event, the Judgment Debtor
himself states that it is not possible to find a purchaser to
buy the said property. In view thereof, I am not inclined to
entertain the above Notice of Motion. However, it is open to
the Judgment Debtor to deposit the decretal amount with
the Prothonotary and Senior Master, High Court, Bombay
and take such steps thereafter, for discharge of this Notice.
The Notice of Motion is therefore, dismissed. "
3. On 18 February, 2020, this Insolvency Petition, which was on
lodging number earlier, was numbered as Petition No.9 of 2020. On 2 nd
March, 2020 an appeal was filed by the Judgment Debtor against the
dismissal of the Notice of Motion. On 16th March, 2022 the numbered
Petition was served upon the Judgment Debtor. On 19 th August, 2022,
order was passed to serve the said Petition upon the Judgment Debtor
by three modes and service was completed. On 20 th September, 2022
the Appeal that was filed against the dismissal of the Notice of Motion
was dismissed for non-removal of office objections. On 3 rd March, 2023,
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order was passed by this Court recording that the Judgment Debtor was
desirous of settling the dispute with the Petitioner and time was
granted to the Judgment Debtor. On 28th April, 2023, order was passed
by this Court recording that payments shall be made and the Judgment
Debtor shall meet the Petitioner and hold negotiations.
4. On 22nd June, 2023 affidavit in reply was filed by the Judgment
Debtor opposing the Petition. On 4th July, 2023, Judgment Debtor made
part payment of Rs.10,00,000/-.
5. Mr. Simil Purohit, learned Counsel for the Petitioning Creditor
would submit that as on 30th June, 2023 the total decretal amount due
and payable is Rs.21,37,78,446.52/- plus further interest from 1st July,
2023 as mentioned in the consent decree dated 9 th February, 2017. Mr.
Purohit, would submit that the only ground raised by the Judgment
Debtor is that the act of insolvency was committed upon the dismissal
of the Notice of Motion and has to be reckoned from 6 th November,
2019 but the Petition was filed at least 10 months before the alleged
act of insolvency and therefore, the Petitioner has no cause of action as
the Petition is premature.
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6. Mr. Purohit, has taken this Court to Section 9 of the Presidency
Towns Insolvency Act, 1909 (the "Insolvency Act") and would submit
that pursuant to Section 9(2), of the Insolvency Act, a Debtor commits
an act of insolvency if a Creditor who has obtained a decree against
him for payment of money has served on him a notice as provided in
Sub-section (3) and the Debtor does not comply with that notice within
the period specified therein. Learned Counsel would submit that in
accordance with Section 9(3), Insolvency notice was served upon the
Judgment Debtor in the prescribed form and in the prescribed manner
on 8th December, 2018. The Judgment Debtor made an application viz.
Notice of Motion No.11 of 2019 for setting aside the Insolvency Notice
which came to be dismissed on 5 th November, 2019. Learned Counsel
would submit that when an application for setting aside the Insolvency
notice is rejected by the Court, the Judgment Debtor shall be deemed to
have committed an act of insolvency under this Sub-section on the date
of rejection of the Application or the expiry of the period specified in
the insolvency notice for its compliance, whichever is later, would mean
that the rejection of the Notice of Motion would relate back to the act
of insolvency committed under the Sub-section i.e. on 13 th January,
2019 which is the day after the expiry of the 35 day period mentioned
in the insolvency notice which was served upon the Judgment Debtor
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on 8th December, 2018. Mr.Purohit, would submit that this
interpretation would be supported by Rules 52B to 52G of the Bombay
Insolvency Rules, 1910 framed under Section 112 of the Insolvency Act.
Learned Counsel would in particular refer to Rule 52B(4) and submit
that the said sub rule clearly provides that non compliance by the
Debtor with the requirements of the notice within the specified period
will be treated as an act of insolvency on the Debtor's part. He also
refers to Rule 52C and submits that the very fact that the said rule
provides that the application to set aside the insolvency notice cannot
be heard until after the expiry of the time specified in the notice as the
day on which the act of insolvency will be complete and the Insolvency
Registrar shall extend the time and no act of insolvency shall be
deemed to have been committed under the notice until the application
shall be heard and determined, does not address the peculiar facts of
this case where the Insolvency Petition has been filed prior to the
Notice of Motion for setting aside the Insolvency notice. Learned
Counsel submits that therefore the submissions that the Insolvency
Petition was in abeyance until the hearing of the Notice of Motion to set
aside the Insolvency Notice. In support, learned Counsel also refers to
Rule 52G which provides that an adjudication order shall not be made
against the Debtor on a Petition in which the act of insolvency alleged
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is non-compliance with an insolvency notice within the appointed time
where such Debtor shall have applied to set aside such notice until after
the hearing of the application but in such a case the Petition shall be
adjourned or dismissed as the Court may think fit. Learned Counsel
submits that accordingly in the facts of this case the Petition is being
heard only after the Notice of Motion has been set aside.
7. Learned Counsel refers to the decision of this Court in the case of
Bharat Chandulal Nanavati and another Vs. United Commercial Bank,
Bombay-231, in support of his contentions and in particular paragraphs
8 and 9 thereof to submit that, if the Judgment Debtor fails to have the
insolvency notice set aside, then it must be necessarily held that the
Debtor did commit an act of insolvency on the expiry of the period
mentioned in the insolvency notice and becomes entitled to an order of
adjudication in ordinary course and there is no question of such
creditor proving any debt or any act of insolvency as required under
Section 13(2) of the Insolvency Act. As the failure on the part of the
Debtor in having the insolvency notice set aside is the proof of the act
of insolvency. Learned Counsel would submit that the scheme of the
law of insolvency is such that, once an order of adjudication is made, it
1 1988 SCC OnLine Bom 209
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relates back to the date of commission of an act of insolvency i.e. 13 th
January, 2019 when the 35 days mentioned in the insolvency notice
had expired and the Judgment Debtor had failed to make payment.
Learned Counsel would submit that after the dismissal of the Notice of
Motion on 5th November, 2019, the Insolvency Petition, which was kept
in abeyance, in view of clause (b) to the first proviso to Sub-Section (2)
of Section 9 of the Insolvency Act read with Rules 52B(4), 52-C, and
52G of the Bombay Insolvency Rules, would get activated. That this
Court therefore, declare that the Judgment Debtor committed an act of
insolvency under Sub-Section (2) of the Section 9 of the Insolvency Act.
8. Referring to the Division Bench judgment of this Court in the
Case of Ali D. Gandhi v. S.L. Thakurdas2, relied upon by the learned
Senior Counsel for the Judgment Debtor, learned Counsel would submit
that the said decision is not applicable to the facts of this case as the
said decision was addressing the specific question of subsequent events
i.e. whether the events which take place after the issuance of the notice
and even after the period specified in the insolvency notice is over, can
be considered by the Insolvency Court at the stage of the Notice of
Motion for setting aside the insolvency notice. Secondly, learned
2 The Bombay Law Reporters 1974 Vol. LXXVII P.119
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Counsel would submit that the said decision concerns Section 9A of the
Insolvency Act and not Section 9 (2) and also Rule 52C of the
Insolvency Rules and therefore, the said decision would not assist the
case of the Judgment Debtor. He would, however, submit that while an
application for setting aside the Insolvency notice is pending, under
Rule 52C the Insolvency Registrar is empowered to extend the time
specified in the notice and if such time is so extended, then it is
provided that no act of insolvency shall be deemed to have been
committed under the notice until the application shall be heard and
determined which means that the act of insolvency as contained in the
judgment is kept in abeyance, but as soon as the Notice of Motion is
dismissed, the commission of the said act gets confirmed and relates
back to the date soon after the expiry of the original 35 days period as
mentioned in the said notice. Learned Counsel, therefore, urges this
Court to adjudicate the Judgment Debtor as Insolvent by allowing this
Petition.
9. On the other hand, Mr. M.P.S. Rao, learned Senior Counsel for
the Judgment Debtor would firstly submit that there is no dispute with
respect to the facts in the matter. However, drawing the attention of
this Court to a Division Bench judgment of this Court in the case of Ali
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D. Gandhi v. S.L. Thakurdas (supra), learned Senior Counsel would
submit that, it is important firstly to appreciate that an order of
adjudication is visited with serious consequences on the Judgment
Debtor and affects his very status, pursuant to which he meets with a
civil death and therefore, it is necessary that the provisions of the
Insolvency Act be construed strictly and in favour of the Debtor in as
much as the status of the Debtor is sought to be affected thereby.
Learned Senior Counsel would submit that there is no other Creditor
except the Petitioner and therefore, this Court bear in mind that this
adjudication would only be for the benefit of the Petitioner and not for
the general body of the Creditors.
10. Learned Senior Counsel would submit that, it is clear that the
combined effect of Rule 52B and Rule 52C is that the insolvency notice
has to be complied with within the time specified in the notice, which,
so far as Bombay is concerned, is 35 days. A Judgment Debtor on
whom an insolvency notice has been served may, thus, within the
period of 35 days allowed to him for compliance with the notice, apply
to the Court to set aside the insolvency notice, firstly, on the grounds
set out the sub-clause (a) and (b) of Rule 52B and, as stated above, on
any other ground which would come within the ambit of sub-clause (c)
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of that Rule. It is submitted that so far as Rule 52C is concerned, it is to
be noted that if it is not possible that an application of the judgment-
debtor for setting aside the insolvency notice can be heard and
determined by the Court within the period specified in the notice and
even if the judgment-debtor were to take out a notice of motion on the
very day on which the insolvency notice is served on him, Rule 52C
would come to his aid and the Insolvency Registrar who is empowered
to extend the time specified in the notice can extend the time period
specified in the notice and no act of insolvency shall be deemed to have
been committed under the notice until the application shall be heard
and determined. Learned Senior counsel submits that thus, by a legal
fiction the act of insolvency is held not to have been committed on the
expiry of the original specified period and the act of insolvency is, so to
say, kept in abeyance.
11. Learned Senior Counsel would submit that the Petitioning
Creditor has missed the provisions of Section 12 of the Insolvency Act
which provide that the act of insolvency on which the Petition is
grounded has to have occurred within three months of the Petition.
Referring to clause (b) to the first provision, Sub-Section (2) of
Section 9 of the Insolvency Act read with Rule 52B(4), 52C, and 52G of
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the Bombay Insolvency Rules, learned Senior Counsel would submit
that the clause (b) clearly provides that the act of insolvency shall be
deemed to have been committed on the date of rejection of the
application for setting aside of the Insolvency notice or on the expiry of
the period specified in the Insolvency notice for its compliance,
whichever is later. Learned Counsel would submit that the Notice of
motion was dismissed on 5th November, 2019 and even though the 35
days period mentioned in the Notice expired prior to 13 th January, 2019
in view of clause (b), the act of insolvency would deemed to have been
committed on 5th November, 2019 and therefore, the Insolvency
Petition should have been filed in three months of the said date as per
Section 12(1)(c) of the Insolvency Act and therefore, the Petition is
premature and ought to be dismissed on this ground alone. Learned
Senior Counsel also refers to Rule 52C as well as 52G of the Insolvency
Rules to submit that pending the decision on the application to set
aside the insolvency notice, the insolvency notice or the Insolvency
Petition would have to be kept in abeyance or adjourned or dismissed.
12. Referring the decision Single Judgment of this Court in the case
of Bharat Chandulal Nanavati and another Vs. United Commercial
Bank, Bombay-23 (supra) relied upon by the Petitioner, learned Senior
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Counsel would submit that the said decision is distinguishable on facts
in as much as in that case, the Judgment Debtors had not made any
application to set aside the insolvency notice and therefore, the said
decision did not have an occasion to consider a situation as in the facts
of this case, when it held that if the Judgment Debtor fails to make any
application to set aside the notice or to have the same set aside the
Judgment Debtor committed an act of insolvency on the expiry of the
period mentioned in the insolvency notice. Learned Senior Counsel also
submits that the principle of relation back referred to in the said
decision while setting out the scheme of insolvency law in the said
decision was in a situation where an order of adjudication was made
and not in the facts of the present case where an order of adjudication
is yet to be made. Learned Senior counsel would submit that there
cannot be any quarrel with the principle that once an order of
adjudication is made it relates back to the date of commission of an act
of insolvency and in such a case time ceases to run as from that date.
13. Learned Senior Counsel would submit that in the facts of this
case the point is that the later of the dates between one on which the
notice of motion has been dismissed and the other on which the period
specified in the insolvency notice has expired has to be taken. And the
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insolvency petition in accordance with Section 12 is to be filed within
three months of that later date and not before. Learned Senior Counsel
would submit that the present petition is premature and deserves to be
dismissed.
14. I have heard the learned Counsel for the parties and considered
the rival contentions.
15. No doubt adjudicating a person as an insolvent result in serious
consequences including civil death of the person so adjudged and
therefore, the provisions of the Insolvency Act have to be construed
strictly.
16. Therefore, before proceeding further it would be apposite to
quote the relevant provisions of the Insolvency Act as well as
Insolvency Rules. Sections 9 and 12 of the Insolvency Act, are usefully
quoted as under:-
9. Acts of insolvency.--(1) A debtor commits an act of
insolvency in each of the following cases, namely :--
(a) if, in the States or elsewhere, he makes a transfer of
all or substantially all his property to a third person for the
benefit of his creditors generally;
(b) if, in the States or elsewhere, he makes a transfer of
his property or of any part thereof with intent to defeat or
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delay his creditors;
(c) if, in the States or elsewhere, he makes any transfer
of his property or of any part thereof, which would, under
this or any other enactment for the time being in force, be
void as a fraudulent preference if he were adjudged an
insolvent;
(d) if, with intent to defeat or delay in his creditors,--
(i) he departs or remains out of the States
(ii) he departs from his dwelling-house or usual place of
business or otherwise absents himself.
(iii) he secludes himself so as to deprive his creditors of
the means of communicating with him,
(e) if any of his property has been sold or attached for a
period of not less than twenty-one days in execution of the
decree of any Court for payment of money;
(f) if he petitions to be adjudged an insolvent;
(g) if he gives notice to any of his creditors that he has
suspended, or that he is about to suspend, payment of his
debts;
(h) if he is imprisoned in execution of the decree of any
Court for the payment of money.
(2) Without prejudice to the provisions of sub-section (1), a
debtor commits an act of insolvency if a creditor, who has
obtained a decree or order against him for the payment of
money (being a decree or order which has become final and
the execution whereof has not been stayed), has served on
him a notice (hereinafter in this section referred to as the
insolvency notice) as provided in sub-section (3) and the
debtor does not comply with that notice within the period
specified therein :
Provided that where a debtor makes an application under
sub-section (5) for setting aside an insolvency notice--
(a) in a case where such application is allowed by the
Court, he shall not be deemed to have committed an act of
insolvency under this sub-section; and
(b) in a case where such application is rejected by the
Court, he shall be deemed to have committed an act of
insolvency under this sub-section on the date of rejection of
the application or the expiry of the period specified in the
insolvency notice for its compliance, whichever is later:
Provided further that no insolvency notice shall be served
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on a debtor residing, whether permanently or temporarily,
outside India, unless the creditor obtains the leave of the
Court therefor.
(3) An insolvency notice under sub-section (2) shall--
(a) be in the prescribed form;
(b) be served in the prescribed manner;
(c) specify the amount due under the decree or order and
require the debtor to pay the same or to furnish security
for the payment of such amount to the satisfaction of the
creditor or his agent;
(d) specify for its compliance a period of not less than
one month after its service on the debtor or, if it is to be
served on a debtor residing, whether permanently or
temporarily, outside India, such period (being not less than
one month) as may be specified by the order of the Court
granting leave for the service of such notice;
(e) state the consequences of non-compliance with the
notice.
(4) No insolvency notice shall be deemed to be invalid by
reason only that the sum specified therein as the amount
due under the decree or order exceeds the amount actually
due, unless the debtor, within the period specified in the
insolvency notice for its compliance, gives notice to the
creditor that the sum specified in the insolvency notice does
not correctly represent the amount due under the decree or
order :
Provided that if the debtor does not give any such notice as
aforesaid, he shall be deemed to have complied with the
insolvency notice if, within the period specified therein for
its compliance, he takes such steps as would have
constituted a compliance with the insolvency notice had the
actual amount due been correctly specified therein.
(5) Any person served with an insolvency notice, may
within the period specified therein for its compliance, apply
to the Court to set aside the insolvency notice on any of the
following grounds, namely :--
(a) that he has a counter-claim or set off against the
creditor which is equal to or is in excess of the amount due
under the decree or order and which he could not, under
any law for the time being in force, prefer in the suit or
proceeding in which the decree or order was passed;
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(b) that he is entitled to have the decree or order set
aside under any law providing for the relief of indebtedness
and that--
(i) he has made an application before the competent
authority under such law for the setting aside the decree or
order; or
(ii) the time allowed for the making of such application
has not expired;
(c) that the decree or order is not executable under the
provisions of any law referred to in clause (b) on the date of
application.
Explanation. -- For the purposes of this section, the act of
an agent may be the act of the principal, even though the
agent have no specific authority to commit the act.
12. Conditions on which creditor may petition.-- (1) A
creditor shall not be entitled to present an insolvency
petition against a debtor unless--
(a) the debt owing by the debtor to the creditor, or, if two
or more creditors join in the petition, the aggregate amount
of debts owing to such creditors, amounts to five hundred
rupees, and
(b) the debt is a liquidated sum payable either
immediately or at some certain future time; and
(c) the act of insolvency on which the petition is
grounded has occurred within three months before the
presentation of the petition:
Provided that where the said period of three months
referred to in clause (c) expires on a day when the Court is
closed, the insolvency petition may be presented on the day
on which the Court reopens.
(2) If the petitioning creditor is a secured creditor, he
shall in his petition either state that he is willing to
relinquish his security for the benefit of the creditors in the
event of the debtor being adjudged insolvent or give an
estimate of the value of the security. In the latter case he
may be admitted as a petitioning creditor to the extent of
the balance of the debt due to him after deducting the value
so estimated in the same way as if he were an unsecured
creditor.
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17. Rules 52A to 52G of the Bombay Insolvency Rules, 1910 are
also usefully quoted as under :-
52A. (1) A creditor, desirous that an Insolvency notice
may be issued shall produce to the Insolvency Registrar a
certified copy of the decree or order on which the notice is
founded and file the notice, together with a request for
issue. The Creditor shall at the same time lodge with the
Insolvency Registrar two copies of the Insolvency notice to
be sealed and issued for service.
(2) An insolvency notice shall be in Form No.1-B with
such variations as circumstances may require.
52B. (1) Every Insolvency notice shall be endorsed with
the name and place of business of the attorney actually
suing out the same, or if no attorney be employed, with a
memorandum that it is sued out by the creditor in person.
(2) The notice shall require the debtor to pay the amount
claimed or to furnish security for the payment of the
amount to the satisfaction of the creditor or his agent.
(3) There shall also be indorsed on every notice an
intimation to the debtor that if he has a counterclaim or set
off which equals or exceeds the decretal amount or the
amount ordered to be paid by him and which he could not
lawfully set up in the suit or proceeding in which the decree
or order was made against him he must within the time
specified on the notice apply to the Court to set aside the
notice.
(4) Non compliance by the debtor with the requirements
of the notice within the specified period will be treated as
an act of insolvency on the debtor's part.
(5) Any person served with an Insolvency notice may
within the time allowed for compliance with that notice
apply to the Court to set aside the Insolvency notice :
(a) on the ground that he has paid the amount claimed
or furnished security for the payment of the amount
to the satisfaction of the creditor or his agent;
(b) on the ground that he has a counterclaim or setoff
which equals or exceeds the decretal amount or the
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amount ordered to be paid by him and which he
could not lawfully set up in the suit or proceeding in
which the decree or order was made; or
(c) on any other ground which would in law entitle him
to have the notice set aside.
52C. An application to set side the insolvency notice shall
be made by a notice of motion and if the application cannot
be heard until after the expiry of the time specified in the
notice as the day on which the act of insolvency will be
complete the insolvency Registrar shall extend the time and
no act of insolvency shall be deemed to have been
committed under the notice until the application shall be
heard and determined.
52D. Subject to the power of the Court to extend the time,
an insolvency notice to be served in India shall be served
within one month from the date of issue thereof. A notice,
not so served shall be set down on Board by the Insolvency
Registrar for dismissal.
52E. An insolvency notice shall be served and service
thereof shall be proved in the like manner as is by these
Rules prescribed for the service of a creditor's petition.
52F. When the Court makes an order setting aside the
insolvency notice it may at the same time declare that no act
of insolvency has been committed by the debtor under such
notice.
52G. An adjudication order shall not be made against a
debtor on a petition in which the act of insolvency alleged is
non-compliance with an insolvency notice within the
appointed time where such debtor shall have applied to set
aside such notice until after the hearing of the application,
or where the notice has been set aside ordering a stay of the
proceedings thereon. But in such case the petition shall be
adjourned or dismissed as the Court may think fit.
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18. As submitted by the Ld. Senior Counsel for the Judgment Debtor,
facts are not in dispute. The only issue is whether the act of insolvency
was committed upon the dismissal of the Notice of Motion on 5 th
November, 2019 and has to be reckoned from 6 th November, 2019 and
therefore whether this Petition filed on 23rd January, 2019, i.e. prior to
the said dismissal, is to be dismissed as being premature, there being
no cause of action on the date of filing of the Petition.
19. As noted above, it is not in dispute that the Judgment Debtor
owes to the Petitioner, Rs.21,37,78,446.52 (subject to adjustment of
part payment of Rs.10,00,000/- by the Judgment Debtor on 04 th July,
2023). Since the Judgment Debtor failed to make payment in terms of
Consent Decree dated 09th February, 2017, an Insolvency Notice was
served upon the Judgment Debtor on 8th December, 2018 giving 35
days to the Judgment Debtor to make payment of the decretal amount
which ended on 12th January, 2019. As the Judgment Debtor had failed
to make the payment, an act of insolvency was said to have been
committed by the Judgment Debtor on 13th January, 2019 in
accordance with Section 9(2) of the Insolvency Act. However, on 14 th
January, 2019, the Judgment Debtor took out an application by way of
a Notice of Motion for setting aside the Insolvency Notice and while the
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Notice of Motion was pending, on 23rd January, 2019 (i.e. within three
months from 14th January, 2019), this Insolvency Petition was filed by
the Petitioning Creditor for adjudging the Judgment Debtor as an
insolvent. While the Insolvency Petition was pending, on 5 th November,
2019, the Notice of Motion seeking to set aside the Insolvency Notice
was dismissed. It is also to be noted that an appeal against the same
also came to be dismissed for want of prosecution.
20. Mr. Purohit, learned Counsel for the Petitioning Creditor has
argued that in view of the provisions of the Insolvency Act read with
the rules, until the dismissal of the Notice of Motion, the Insolvency
Petition was kept in abeyance and got activated as soon as the Notice of
Motion came to be dismissed and the date of act of Insolvency would
therefore relate back to after the end of the 35 th day under the
Insolvency Notice. While Mr. Rao, learned Senior Counsel for the
Judgment Debtor would submit that in terms of clause (b) to the first
proviso of Section 9(2), the later of the dates, of the expiry of period
specified in the Insolvency Notice or the dismissal of the Notice of
Motion would mean that the Insolvency Petition in accordance with
Section 12 should have been filed within 3 months of the date of
dismissal of the Notice of Motion i.e. within 3 months from 5 th
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November, 2019 and therefore this Insolvency Petition filed earlier is
premature and to dismissed as the provisions of the Insolvency Act,
which have to be construed strictly in view of the serious consequences
that visit upon being adjudicated as insolvent.
21. Section 9 sets out acts of insolvency. As quoted above, Section
9(1) sets out eight cases when it is said that a debtor commits an act of
insolvency. Section 9(2), which we are concerned with, also sets out
another act of insolvency which is without prejudice to the eight acts
mentioned in section 9(1) above i.e. when the Judgment Debtor has
not complied with the Insolvency Notice served upon him within the
specified period, pursuant to a final decree in favour of the Petitioning
Creditor.
22. It is not in dispute that the subject act of insolvency of the
Judgment Debtor falls under Section 9(2) of the Insolvency Act as the
Judgment Debtor has not complied with the Insolvency Notice within
the specified period, pursuant to a final decree in favour of the
Petitioning Creditor.
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23. A Consent Decree dated 09th February, 2017 was passed in
Summary Suit No. 657 of 2016. Thereafter the Petitioning Creditor had
taken out an Insolvency Notice dated 16 th October, 2018 pursuant to
the said Consent Decree, which was sealed on 04 th December, 2018 and
served upon the Judgment Debtor on 8 th December, 2018. The
compliance period in the said notice was 35 days which ended on 12 th
January, 2019. Admittedly, by that date neither any payment was made
by the Judgment Debtor to the Petitioning Creditor nor any application
for setting aside the said Insolvency notice was made by the Judgment
Debtor. Therefore, in accordance with Section 9(2), an act of insolvency
was committed by the Judgment Debtor on 13 th January, 2019. In
accordance with Section 12 (1)(c) of the Insolvency Act, a creditor is
entitled to present an Insolvency Petition within three months of the
occurrence of an act of insolvency on the basis of which the Petition is
filed. This Insolvency Petition was accordingly presented on 23 rd
January, 2019, within three months.
24. It has been argued on behalf of the Judgment Debtor that in view
of clause (b) of the first proviso to Section 9(2) of the Insolvency Act
where an application has been made by the Judgment Debtor for
setting aside the notice, the act of insolvency is deemed to have been
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committed on the later of the date of rejection of the application for
setting aside the Insolvency Notice or on the expiry of the period
mentioned in the notice for its compliance. It has been submitted that
therefore although the 35 day period mentioned in the notice expired
on 12th January, 2019, in view of clause (b), the act of insolvency would
be deemed to have been committed on 5 th November, 2019, as the
Notice of Motion was dismissed on that date.
25. Therefore, before proceeding further, it would be apposite to
appreciate the first proviso to sub-section (2) to Section 9. In
accordance with the said proviso, where a debtor makes an application
under sub-section (5) for setting aside an Insolvency Notice, firstly in
clause (a) it is provided that in respect of a case where such application
is allowed by the Court, he shall not be deemed to have committed an
act of insolvency under sub-section (2). We are not concerned with this
clause. Secondly it is provided in clause (b) that in a case where such
an application is rejected by the Court, the debtor shall be deemed to
have committed an act of insolvency under sub-section (2) either on
the date of the rejection of the application or on the expiry of the
period specified in the Insolvency Notice for its compliance, whichever
is later. We are concerned with this clause (b). As noted above,
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according to the Judgment Debtor since the Notice of Motion has been
dismissed on 5th November, 2019, this being the later date, the Petition
ought to have been filed within three months of this date in as much as
the date of dismissal of the Notice of Motion has been mandatorily
deemed to be an act of insolvency under Clause (b). Perhaps the
Judgment Debtor may have been right if the Application/Notice of
Motion for setting aside the Insolvency Notice which is required to be
made under Sub-Section (5) was made in accordance with the said sub-
section as the proviso refers to a situation where Debtor makes an
application in accordance with Sub-Section (5). Sub-section (5) of
Section 9 provides that a person served with an Insolvency Notice may
within the period specified in the said notice for its compliance, apply
to set aside the Insolvency Notice on the grounds mentioned therein.
Admittedly the Notice of Motion has been filed on 14 th January, 2019,
(the website shows the filing date as 16 th January, 2019). Therefore,
whether it is 14th January, 2019 or 16th January, 2019, the Notice of
Motion has been filed after the period specified in the Insolvency Notice
for its compliance had expired. The Application/Notice of Motion has
been dismissed on 5th November, 2019 vide the following order:
"1. The above Notice of Motion is taken out by the Applicant/
Judgment Debtor for setting aside the Insolvency Notice No.
N/28 of 2018 dated 16th October, 2018 taken out by the
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Petitioning Creditor. Affidavit in support is filed by the
Applicant/Judgment Debtor.
2. The Petitioning Creditor has taken out the above
Insolvency Notice pursuant to a consent decree dated 9 th
February, 2017 passed by this Court in Summary Suit No.657
of 2016.
3. From the perusal of the Affidavit in support of the
Insolvency Notice, it appears that the Applicant is not
disputing the consent decree dated 9th February, 2017
passed by this Court. However, due to financial problems, he
is not in a position to pay the decretal amount to the
Petitioning Creditor. He submits that he owns properties at
Surat which have a market value of Rs.10 to 12 Crores. He
further submits that he is in the process of selling/disposing
off his properties and the sale proceeds thereof, would be
utilized towards full and final satisfaction of the decretal
amount of the Petitioning Creditor. He submits that if the
Applicant is declared as Insolvent, no purpose would be
served.
4. On the last date of hearing, the learned Advocate for the
Applicant/Debtor had stated that the matter between the
parties would be settled. The decree in the Summary Suit is
of the year 2017. The Judgment Debtor is not even in a
position to pay the decretal amount. I am not satisfied that
the Judgment Debtor has assets which have a market value
of Rs.10 to 12 Crores. In any event, the Judgment Debtor
himself states that it is not possible to find a purchaser to buy
the said property. In view thereof, I am not inclined to
entertain the above Notice of Motion. However, it is open to
the Judgment Debtor to deposit the decretal amount with the
Prothonotary and Senior Master, High Court, Bombay and
take such steps thereafter, for discharge of this Notice. The
Notice of Motion is therefore, dismissed."
26. Without prejudice to the observation that the Notice of Motion
has been filed after the period for compliance in the Insolvency Notice
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has expired or lapsed, it does not appear from the above quoted order
that the Notice of Motion was filed on any of the grounds mentioned in
(a) to (c) of sub-section (5) to Section 9.
27. It has been urged on behalf of the Judgment Debtor that in view
of the severe consequences that entail adjudication as an insolvent, the
provisions of the Insolvency Act should be strictly construed. Very true.
Construing in the manner as suggested on behalf of the Judgment
Debtor, this Court is of the view that since the Notice of Motion was not
filed within the period specified in the Insolvency Notice for its
compliance, the proviso to clause (b) of sub-section (2) to Section 9
would not be applicable. Clause (b) to sub-section (2) to Section 9 has
to be read and construed harmoniously with sub-section (5) of Section
9. It is only when an application for setting aside the Insolvency Notice
is made within the time period specified for compliance in the notice
that the later of the two dates as per clause (b) to sub-section (2) to
Section 9 would apply. No other sense can be made. In the facts of the
case, had the Judgment Debtor filed the Notice of Motion prior to 13 th
January, 2019, only then the submissions made on behalf of the
Judgment Debtor could have made sense.
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28. However, the facts of the present case are rather different. In the
facts of this case, the act of insolvency was after the 35 th day of the
receipt of the Insolvency Notice i.e. on 13 th January, 2019 by when no
Application/Notice of Motion had been filed. On the basis of this act of
insolvency, the Insolvency Petition came to be filed by the Petitioning
Creditor on 23rd January, 2019 within three months of its occurrence as
per Section 12(1)(c) of the Insolvency Act. The Notice of Motion filed
for setting aside the Insolvency Notice has not been made prior to the
expiry of the 35th day i.e. not in accordance with sub-section (5) and
therefore, the deeming fiction in clause (b) to sub-section (2) to
Section 9 would not be applicable to the facts of this case.
29. Therefore, as has been the turn of events, although the
Insolvency Petition was filed on 23rd January, 2019, the Notice of
Motion to set aside the Insolvency Notice that was filed after the period
for compliance mentioned in the Insolvency Notice was heard and
dismissed on 5th November, 2019, after which the Reply has been filed
by the Judgment Debtor to this Petition making the above submissions,
which has been heard by this Court on 7th November, 2023.
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30. In view of the above discussion, the submissions made on behalf
of the Judgment Debtor are not tenable. It cannot, therefore, be said
that the Petition is premature for want of cause of action.
31. The learned Counsel have referred to Rules 52A to 52G of the
Bombay Insolvency Rules, 1910, with particular reference to the
application for setting aside the Insolvency Notice. The said Rules have
been framed under Section 112 of the Insolvency Act for carrying out
into effect the objects of the Insolvency Act. Rule 52B(4) provides that
non-compliance of the debtor with the requirements of the notice
within the specified period will be treated as an act of insolvency on the
debtor's part. Rule 52B(5) provides that a person served with an
Insolvency Notice may within the time allowed for compliance with
that notice apply to the Court to set aside the Insolvency Notice on
practically the same grounds as mentioned in sub-section (5) to Section
9. This sub-rule is similar to Section 9(5) as this also reiterates that the
application to set aside the notice should be made within the time
allowed for compliance in the notice.
32. Rule 52C provides that the Application to set aside the Insolvency
Notice shall be made by a Notice of Motion and if the said Application
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cannot be heard until after the expiry of the time specified in the Notice
as the day on which the act of insolvency will be complete, the
Insolvency Registrar shall extend the time and no act of insolvency
shall be deemed to have been committed under the Notice until the
Application shall be heard and determined. In my view, the said Rule is
subject to Section 9 (5) of the Insolvency Act as well as Rule 52 B (5) of
the Rules, which require an application to set aside the Insolvency
notice to be made within the time specified therein for compliance,
which as observed has not been done in the facts of this case as the
Notice of Motion has been filed after the period specified in the Notice
for its compliance in breach of sub-section (5) of Section 9 of the
Insolvency Act.
33. The Rules have been made under Section 112 of the Insolvency
Act and have to be read and construed harmoniously with each other in
accordance with the provisions of the Insolvency Act, would be
subordinate to the substantive sections of the Act such as Section 9(5)
or the other provisions of the Insolvency Act and cannot obviously be
construed or read in isolation or dehors or in derogation thereof.
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34. Coming to Rule 52G, which provides that an adjudication order
shall not be made against the Debtor on a Petition in which the act of
insolvency alleged is non compliance with an Insolvency notice, within
the appointed time where such Debtor shall have applied to set aside
such notice until after hearing of the application and that the Petition
shall be adjourned or dismissed as the Court may think fit, also is
subject to Section 9(5) and Rule 52B(5) and has to be read in harmony
with the Act and Rules and cannot be read in derogation thereof or in
isolation.
35. In any event, this Petition has been heard only after the dismissal
of the Notice of Motion for setting aside the Insolvency Notice.
36. Relying upon the decision of this Court in the case of Bharat
Chandulal Nanavati and another Vs. United Commercial Bank,
Bombay-23 (supra), Mr. Purohit, learned Counsel for the Petitioning
Creditor, has submitted that in accordance with the scheme of the
Insolvency Act, the failure on the part of the Judgment Debtor in
having the Insolvency Notice set aside is only a proof of the act of
insolvency and an order of adjudication would relate back to the date
of commission of the act of insolvency i.e. 13 th January, 2019. A perusal
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of the said decision and particularly paragraphs 8 and 9 which are
usefully quoted as under suggests that the said submission has merit:-
"8. Therefore, after the service of the insolvency notice, it is
for the Judgment Debtor to make an application for
discharge of the notice within the time prescribed in the
notice. It is in that notice he has to make out a case as to
why the decree is not executable. It is at that stage that
Court has to consider whether the decree is not execuatable
for any reason, under any law, including the question of
limitation if any. If the judgment-debtor fails to make any
such applicatio nor fails to have the said notice set aside, it
must necessarilybe held the debtor did commit an act of
insolvency on the expirty of the period mentioned in the
Insolvency Notice and if the judgment creditor files a
petition under section 10 read with section 12 of the Act, he
becomes entitled to an order of adjudication in the ordinary
course. In such a case there is not question of such a creditor
providing any debt or any act of insolvency as required
under section 13(2) of the Act, inasmuch as the decree itelf
is the proof of debt and the failure on the part of the debtor
in having the Insolvency Notice set aside, is the proof of the
act of insolvency. There can be no further enquiry under
section 13 of the Act whether the decree is executable or not
at the time of hearing of such a petition or at the time of
passing an order of adjudication. The question whether a
decree is executable or not is relevant in an application
made by the debtor to have the Insolvency notice set aside,
but not so, at the hearing of the petition or at the time
passing of an order of adjudication.
9. The scheme of the law of insolvency is such that once an
order of adjudication is made, it relates back to the date of
commission of an act of insolvency. In such a case, time
ceases to run as from that date. It is at that date the property
of insolvent vests in the Official Assignee. As from the date
the Indian Limitation Act ha no application and the
relationship of debtor and creditor ceases to exist. That why
under section 13(8) of the Act, a creditor having presented a
petition on commission of an act of insolvency, has no right
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to withdraw without the leave of the Court. Since the act of
insolvency on which the petition is grounded has occurred
within three months before the presentation of the petition,
the petition as from the date of its presentation is for the
benefit of the general class of creditors and not for and on
behalf of the petitioning creditor alone."
37. That in the facts of the above decision, the Judgment Debtors
had not made any application to set aside the Insolvency notice, would
not, in my view, have made any difference had the Judgment Debtors
made such an application, as the above findings are on principles of
law.
38. Coming to the decision of a Division Bench of this Court in the
case of Ali D. Gandhi v. S.L. Thakurdas (supra) relied upon on behalf of
the Judgment Debtor, as mentioned above, no doubt we should keep in
front of us at all times that an order of adjudication visits serious
consequences on the Judgment Debtor and affects his very status and
that therefore it is necessary for the Court to interpret the provisions
keeping in mind that the law of Insolvency has not only been enacted
for the benefit of the general body of creditors so that there may be an
equitable distribution of whatever assets are left with the Judgment
Debtor but also for the protection of the Judgment Debtor himself. True
also as noted above that the provisions of the Insolvency Act have to be
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construed strictly. And only if possible in favour of the debtor in as
much as the status of the debtor is sought to be affected thereby.
39. In the facts of this case as observed above, the Judgment Debtor
has failed to comply with the Insolvency Notice and even the Notice of
Motion to set aside the said Notice has been dismissed. It has been
recorded in the order dismissing the Notice of Motion that the
Judgment Debtor is not disputing the Consent Decree dated 09 th
February, 2017 passed by this Court but due to financial problems he is
unable to pay the decretal amount although it has been submitted that
he owns properties in Surat which have a market value of Rs.10-12
crores. Therefore it is quite clear that the Judgment Debtor is not
serious about protecting his status. The Petitioing Creditor has been
waiting since 2017 to recover dues of over Rs.21 crores. It is not
possible therefore to construe the provisions of the Insolvency Act in
favour of the Judgment Debtor in the facts of this case.
40. There cannot be any dispute that the combined effect of Rule
52B and Rule 52C is that the Insolvency Notice has to be complied
within the time specified in the Notice, which for Bombay is 35 days. A
Judgment Debtor on whom an Insolvency Notice has been served may
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within 35 days allowed to him for compliance with the Notice apply to
the Court to set aside the Insolvency Notice on the grounds set out
therein which is what the Judgment Debtor in the facts of this case has
not done. He has filed the Notice of Motion after the expiry of the 35
days.
41. As far as Rule 52C is concerned, as noted above, the same cannot
be read or construed in derogation of or be read in isolation to Section
9(5) and Rule 52B(5) and only if that was complied with, Rule 52C
could have to be applied by the Registrar to extend the time period of
the Notice in which case no act of insolvency would have deemed to
have been committed until the determination of the said Application. In
such a case, by legal fiction, the act of insolvency would not have been
held to be committed on the expiryof the original specified period, the
act of insolvency having been kept in abeyance, but that is not so here.
42. In any event, the said decision in the case of Ali D. Gandhi v. S.L.
Thakurdas(supra) was addressing the question of subsequent events as
to whether the events which take place after the issuance of a Notice
under Section 9A (and not Section 9) and whether even after the
period specified in the Insolvency Notice is over whether such events
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can be considered by the Insolvency Court in a Notice of Motion for
setting aside the Insolvency Notice. Therefore, the decision in the case
of Ali D. Gandhi v. S.L. Thakurdas(supra) in my view, does not lend any
assistance to the Judgment Debtor.
43. In the circumstances, the Petition is allowed. The Judgment
Debtor has committed act of insolvency under Sub-Section (2) to
Section 9 of the Insolvency Act. The Judgment Debtor is adjudicated as
insolvent in terms of the Insolvency Act and all the effects and
consequences under the said Act shall follow.
44. After the judgment is pronounced, Mr. Sunil Patel, learned
Counsel for the Judgment Debtor seeks a stay of the said order for a
period of four weeks. The Application for stay is rejected.
(ABHAY AHUJA, J.)
