Cheruvu Nageswaraswami vs Rajah Vadrevu Viswasundara Rao and others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 76 of 1950

Decision Date: 18 May, 1953

Coram: B.K. Mukherjea, Mehr Chand Mahajan, Ghulam Hasan, Natwarlal H. Bhagwati

Cheruvu Nageswaraswami brought a petition against Rajah Vadrevu Viswasundara Rao and others, and the matter was heard by the Supreme Court of India. The judgment was authored by B K Mukherjea, who was one of the judges on the bench together with Mehr Chand Mahajan, Ghulam Hasan, and Natwarlal H Bhagwati. The petitioner's name was recorded as Cheruvu Nageswaraswami, while the respondents were identified as Rajah Vadrevu Viswasundara Rao and the additional parties. The Court pronounced its decision on 18 May 1953. The bench was listed under the names of Mukherjea, Mahajan, Hasan, Bhagwati, and Natwarlal H Bhagwati. The case was cited as 1953 AIR 370 and 1953 SCR 894. The substantive issue concerned Hindu law relating to debts and the authority of a father, governed by the Mitakshara school, to alienate his sons’ interest in joint family property for the satisfaction of antecedent debts. The Court examined whether such an interest constituted “property” that could pass to a receiver under the Provincial Insolvency Act, 1920, as amended in 1948, and whether a sale by that receiver would vest the sons’ interest in the purchaser. The amendment of 1948 to Section 28A of the Provincial Insolvency Act was held to operate retrospectively. Consequently, when a Hindu father under Mitakshara law was adjudged a bankrupt, his power to alienate his sons’ interest in the joint family property for legitimate antecedent debts transferred to the receiver, treating that interest as the receiver’s “property” within the meaning of the Act. The Court therefore held that if such a father had mortgaged the joint family property for an antecedent debt that was not illegal or immoral and later became insolvent, the receiver’s sale of the property transferred the sons’ interest to the purchaser, even if the sale occurred before the 1948 amendment came into force. The sons were consequently unable to redeem the property. The Court referred to the decisions in Sat Narain v. Sri Kishen (63 I.A. 384), Rama Sastrulu v. Balakrishna Rao (I.L.R. 1943 Mad. 83), and Viswanath v. Official Receiver (I.L.R. 16 Pat. 60). The judgment also addressed the purchase of an equity of redemption after 22 March 1938, noting that liability to pay the mortgage debt arose only on the date of purchase, but if the debt existed on that earlier date and was payable by an agriculturist, the purchaser could claim the benefits of Section 7 of the Madras Agricultural Relief Act, 1938, provided he was an agriculturist at the time of his application. The case of Periannia v. Sellappa (I.L.R. 1939 218) was cited in that context. The matter arose on civil appellate jurisdiction as Civil Appeal No. 76 of 1950, which was an appeal from the judgment and decree of the High Court of Madras dated 18 April 1945, relating to Appeals Nos. 56 and 192 of 1941 that reversed in part the decree of the Subordinate Judge of Masulipatani in Original Suit No. 29 of 1937. The appellant was represented by counsel appearing with C Mallikarjuna Row, while the respondent’s counsel appeared with R Ganapathy Aiyar. Respondent No. 10 appeared in person. The judgment was delivered on 18 May 1953, and the opinion was authored by Justice Mukherjea.

In the case before the Subordinate Judge at Masulipatam, the sixth defendant was joined as a party in a suit instituted by the plaintiff-respondent under Original Suit No. 29 of 1937 for the recovery of a sum of Rs 99,653 annas odd by enforcement of a simple mortgage bond. The mortgage bond, dated 28 September 1930, had been executed by defendant No. 1 both in his own name and as guardian of his two minor sons, defendants No. 2 and No. 3, who together formed a joint Hindu family at that time. The plaintiff-mortgagee was the son-in-law of defendant No. 1. At the time the mortgage was executed, defendant No. 1 was indebted to many creditors, including the plaintiff, and, feeling pressure from his creditors, he requested the plaintiff to lend him Rs 1,25,000 on the hypothecation of the properties that formed the subject of the suit, so that he could meet his difficulties and discharge his debts.

The consideration of Rs 1,25,000 set out in the deed comprised several components. First, Rs 13,065 represented the amount due on a promissory note dated 17 January 1928 that defendant No. 1 had executed in favour of the plaintiff. Second, Rs 13,285 was due under another promissory note dated 18 August 1930, also executed by defendant No. 1, originally in favour of the plaintiff’s wife and later transferred by her to the plaintiff on 28 September 1930. Third, Rs 25,000 was paid by the plaintiff by endorsing a cheque drawn in his name by the Co-operative Central Bank, Ramchandrapuram, on the Central Urban Bank, Madras, in favour of defendant No. 1. Fourth, Rs 937-8-0 was the cash amount paid by the plaintiff to defendant No. 1 for the purchase of stamps required for the mortgage document. Fifth, Rs 72,712-8-0 represented the amount of future advances which the plaintiff promised to make to defendant No. 1 from time to time at his convenience.

The loan was to bear simple interest at the rate of 7½ percent per annum, with the principal to be repaid on 30 September 1933. Interest was to be payable annually on each 30 September, and any default in such payment would cause the entire principal together with all accrued interest to become immediately due, the default interest being charged at 9 percent compound per annum with yearly rests. The mortgage deed expressly provided that if the mortgagee could not advance the full amount of Rs 1,25,000, the same terms would apply to the actual amount advanced. After execution of the mortgage bond, only Rs 3,000 was advanced by the mortgagee to defendant No. 1 on 5 November 1930. The plaintiff filed the plaint on 15 September 1937, claiming a total of Rs 99,653 annas odd, of which Rs 55,287 annas odd constituted the principal as previously described, and the balance was claimed as interest.

The amount claimed was to be calculated at a rate of nine percent per annum, compounded yearly. In addition to the original mortgagors, who were defendants numbered one through three in the suit, three further persons were impleaded as defendants. Defendant number four was the Receiver in insolvency, into whose hands the entire estate of defendant number one had vested because the District Judge of Kistna had adjudged defendant one bankrupt by order dated eighteenth January, nineteen thirty-two in Insolvency Proceeding number twenty of nineteen thirty-one, which proceeding had been commenced at the instance of another creditor of the first defendant. Defendant number five held a lease over the mortgaged properties from defendant four, while defendant number six was the purchaser who acquired all of the mortgaged properties from the Receiver in insolvency. The Receiver appears to have advertised all the suit properties for sale subject to the mortgage on nineteenth April, nineteen thirty-seven, and the properties were subsequently sold to defendant six for the price of Rs. 1,340. A registered deed of sale, designated as deed I, was executed by the Receiver in favour of the purchaser on twentieth January, nineteen thirty-nine. Defendants one, two and three neither appeared in court nor contested the suit. Defendant four appeared personally but expressly disclaimed any interest in the suit properties. Defendant five argued that his lease from defendant four lasted for only one year and that he was not a necessary party to the suit. The principal defence was raised by defendant six, the purchaser at the Receiver’s sale. In his written statement defendant six pleaded a two-fold defence. First, he alleged that the mortgage bond in issue was a collusive document, unsupported by any consideration, and that it had been executed by defendant one in favour of his own son-in-law in order to shield his properties from his creditors. Second, he contended that the interest claimed was penal and usurious. After the Madras Agriculturists’ Relief Act was passed in March, nineteen thirty-eight, defendant six, with the court’s permission, filed an additional written statement asserting that, as an agriculturist, he was entitled to the reliefs provided by that Act and that the mortgage debt should be reduced in accordance with its provisions. The trial judge, by his judgment dated twenty-nine July, nineteen forty, decreed the suit in part. He held that the mortgage bond was not a collusive instrument intended to defraud the mortgagor’s creditors, but rather a genuine transaction supported by consideration. He further held that defendant six was an agriculturist entitled to claim the reliefs under Madras Act IV of nineteen thirty-eight. After deducting all outstanding interest that stood discharged under section 8(1) of the Agriculturists’ Relief Act, the principal money due to the creditor on that date was determined by the trial court.

The trial court had calculated the amount due to the plaintiff as Rs. 42,870 and some annas. This amount was derived by considering only the original sums actually advanced under the two promissory notes that were mentioned earlier, and by deducting from those sums the payments that the debtor had already made toward the principal of each note. Accordingly, the court issued a preliminary decree in favour of the plaintiff. The decree entitled the plaintiff to recover Rs. 42,870-4-0 together with interest at a rate of six and one-quarter per cent per annum, calculated from 1 October 1937 up to 1 November 1940, which was the date fixed for payment under the preliminary decree. The decree further provided that, in the event of default, the whole amount would attract interest at six per cent per annum. It was also noted that the Subordinate Judge, while deciding issue number three, had expressly held that the provision for payment of compound interest at an enhanced rate, which would apply upon default of the stipulated interest, was in the nature of a penalty and therefore should be relieved against. However, because the court had already reduced the interest under Madras Act IV of 1938, it became unnecessary to examine how such relief should be granted under section 74 of the Indian Contract Act. Two appeals were subsequently filed in the High Court of Madras against this decision. The plaintiff, in appeal number 56 of 1941, challenged the part of the Subordinate Judge’s judgment that had granted relief to defendant number 6 under the Madras Agriculturists’ Relief Act. Defendant number 6, in appeal number 192 of 1941, contested the very basis of the mortgage decree, alleging that the mortgage was a collusive and fraudulent transaction and that the plaintiff’s suit should have been dismissed in its entirety. Defendants numbers 2 and 3, although they had remained as parties ex parte during the trial in the first court, filed a memorandum of cross-objection in forma pauperis. They contested the Subordinate Judge’s decree on the ground that, because their interest in the mortgaged properties had not passed to defendant number 6 by virtue of the Receiver’s sale, their right of redemption remained intact and should have been recognized by the trial judge. The plaintiff’s appeal, the sixth defendant’s appeal, and the cross-objection were all heard together by a Division Bench of the High Court, and a single judgment dated 18 April 1945 disposed of all three matters. The High Court affirmed the trial judge’s finding that the bond in dispute was supported by consideration to the extent of Rs. 55,287-8-0 as alleged in the plaint and that the transaction was valid and bona-fide. Contrary to the trial court, the High Court held that defendant number 6 was not entitled to any relief under the Madras Agriculturists’ Relief Act, and that the lower court was not justified in reducing the principal amount from Rs. 55,287-8-0 to Rs. 42,870, as there was no renewal of a prior debt in relation to defendant number 6.

The court observed that, with respect to defendant No 6, the clause providing for payment of enhanced interest in the event of default was in effect a penalty; consequently the rate of interest was reduced from a compound rate of nine per cent to a compound rate of seventy-one per cent with yearly rests. The High Court thereafter allowed the cross-objection raised by defendants 2 and 3, holding that the interest of those defendants in the mortgaged properties could not pass to the Receiver merely because their father had become insolvent, and that defendant 6 could not acquire that interest simply by purchasing the property from the Receiver. As a result, defendants 2 and 3 were each granted the right to redeem the mortgaged properties together with defendant 6. In the final order, the plaintiff was decreed to recover a principal sum of Rs 55,287-8-0, with interest calculated at a compound rate of seven and a half per cent with yearly rests up to the date of redemption, and thereafter at a simple rate of six per cent per annum. The interest was to be computed from 28 September 1930 on the amount of Rs 52,287-8-0 and from 5 November 1930 on the balance of Rs 3,000. Defendant 6, dissatisfied with this decree, obtained leave to appeal to the Privy Council; the appeal now came before this Court because the Privy Council’s jurisdiction had been abolished. Counsel appearing for the appellant, Mr Somayya, did not press the earlier contention that the mortgage was fraudulent or void for lack of consideration. Instead, he challenged the High Court’s judgment on three specific grounds. First, he argued that the High Court’s decision permitting defendants 2 and 3 to redeem could not stand in view of the Provincial Insolvency Amendment Act 1948, which had been expressly made retrospective. Second, he maintained that defendant 6 should have been granted relief under the Madras Agriculturists’ Relief Act, with the debt reduced according to that statute, contending that even if defendant 6 was not an agriculturist, relief under Madras Act IV of 1938 was available to him because the original mortgagors were agriculturists. Third, relying on the High Court’s finding that the stipulation for compound interest at an enhanced rate constituted a penalty, he submitted that appropriate relief should have been granted to eliminate any compound interest altogether. The Court found the first of these arguments to be well-founded and worthy of success, noting that there existed a divergence of judicial opinion on whether a father’s powers under Mitakshara law to alienate joint-family property, including his sons’ interests, for the satisfaction of an antecedent debt not incurred for illegal or immoral purposes, vested in the Receiver upon the father’s adjudication as insolvent.

The Court explained that when a father who is a joint-family member adjudicates as insolvent, the authority to alienate his sons’ interest in the family property for the discharge of a debt that was not incurred for illegal or immoral purposes passes to the Receiver. Under the Presidency Towns Insolvency Act, this authority was held to vest in the Official Assignee pursuant to section 52(2) of that Act. In matters governed by the Provincial Insolvency Act, a Full Bench of the Madras High Court had held that the father’s power to dispose of his son’s interest in the joint-family property for satisfaction of his legitimate debts did not constitute “property” within the meaning of section 28(2)(d) of the Provincial Insolvency Act (Sat Narain v. Sri Kishen, (1936) 63 I.A. 384). By contrast, a Full Bench of the Patna High Court expressed an opposite view. This apparent conflict was resolved by the enactment of section 28A in the Provincial Insolvency Amendment Act, 1948, which became operative on 12 April 1948. The amended provision states that the property of an insolvent shall be deemed to include the capacity to exercise, and to take proceedings for exercising, all such powers over property that the insolvent could have exercised for his own benefit at the commencement of his insolvency or before his discharge. The language of the provision makes its operation expressly retrospective. Consequently, the power of Defendant No. 1 to alienate the interests of his sons, Defendants 2 and 3, in the mortgaged properties for satisfaction of his antecedent debts passed to the Receiver as “property” under the Provincial Insolvency Act. Accordingly, on a sale by the Receiver, the interests of Defendants 2 and 3 vested in the sixth defendant, who alone was therefore competent to exercise the right of redemption.

The second issue raised concerned whether the appellant could obtain relief under the Madras Agriculturists’ Relief Act. The High Court rejected the appellant’s claim on two grounds. First, the Court held that the appellant was not a debtor at the date the Act commenced, because he had not yet acquired any interest in the equity of redemption at that time. Second, the Court observed that Defendant No. 6 was not an “agriculturist” as defined in the Act, even though he possessed agricultural lands and therefore prima facie fell within the definition of “agriculturist” given in section 2(ii) of the Act (Ramasastralu v. Balakrishna Rao, I.L.R. [1943] Mad. 83; Viswanath v. Official Receiver, I.L.R. (1936) 16 Pat. 60). The Court noted that the definition excluded him by operation of proviso (D) attached to the relevant sub-section. Regarding the first ground, the Court referred to section …

In this case, the Court noted that section 7 of the Agriculturists' Relief Act expressly provides that “all debts payable by an agriculturist at the commencement of this Act shall be scaled down in accordance with the provisions of this chapter.” Accordingly, the essential condition for the chapter to apply is that a debt must be payable by an agriculturist on the date when the Act came into force, namely 22 March 1938. The learned judges of the High Court correctly observed that the sixth defendant was not a debtor on that date because he did not acquire the equity of redemption until 20 January 1939, when the Receiver in insolvency executed a deed of sale in his favour. However, the Court held that this fact alone does not deprive the appellant of the benefits of the Agriculturists' Relief Act. It is not necessary for the person seeking relief to be personally liable for the debt at the moment the Act commenced. Jurisprudence of the Madras High Court makes clear that the right to claim relief is not limited to the original obligor; it extends to that person’s legal representatives and assignees, and personal liability for the debt is not a prerequisite. While the purchaser of the equity of redemption becomes liable to pay the mortgage debt from the date of purchase, the debt itself, arising from the mortgage bond, existed prior to that purchase. If the debt was payable by an agriculturist on the relevant date, the purchaser, provided he is an agriculturist at the time he applies, may enjoy the privileges of the Act. Consequently, the material question is whether the mortgage debt was payable by an agriculturist on 22 March 1938. The appellant contended that the debt was payable by the mortgagors, who were certainly agriculturists. The Court found no basis for such an assumption on the record. The trial judge was concerned only with the question of whether defendant No 6 was an agriculturist; no issue was raised nor evidence produced regarding the status of defendants 1 to 3 as agriculturists, and the trial judge did not address that aspect at all. Before the High Court, counsel for defendant No 6 argued that even if he himself was not an agriculturist, relief granted to defendants 2 and 3 as agriculturists would extend to him, and therefore urged the court to examine whether the original mortgagors were agriculturists. The learned judges declined to entertain that argument and dismissed that portion of defendant No 6’s claim.

In its discussion, the Court recorded the following observation: “In the present case, the mortgagors have not claimed such a benefit, nor have they adduced any evidence to show that they are agriculturists. We therefore cannot accede to the request of the sixth defendant that the right of the mortgagers to relief should be investigated merely with the object of giving an accidental relief to the non-agriculturist purchaser.” Because this issue had never been investigated, the Court held that it could not conclude that the debt was payable by an agriculturist on the relevant date. The Court noted that although the mortgaged property might have been agricultural land, there was no information as to whether the mortgagors owned any other estates that could bring them within any of the provisos attached to the definition of agriculturist. Accordingly, the appellant was deemed to have failed to demonstrate that a debt payable by an agriculturist existed on 22 March 1938. The High Court had further held that Defendant No. 6 was not an agriculturist because he had purchased certain villages at a court sale for which a peishkush exceeding Rs. 500 was payable. By that purchase he became a “land-holder of an estate” under the Madras Estates Land Act and therefore could not claim the status of agriculturist as defined in proviso (D) to section 2(ii) of that Act. Counsel for the appellant emphasized that the purchase was made only as a benamidar for Defendant No. 5, a position that had been accepted by both lower courts, and argued that the proviso therefore did not apply to him. The Court observed that this point was debatable and that the Madras High Court itself did not show a uniform view. It recognised that a distinction could be drawn between rights exercised in a person’s own individual capacity and rights exercised on behalf of another. Conversely, looking at the definition of “land-holder” in section 3(5) of the Madras Estates Land Act, it could be argued that a benamidar who is entitled to collect rents and is at least the titular owner of the estate might fall within that description. Since the Court had already decided that section 7 of the Agriculturists’ Relief Act was not applicable to the facts of this case, the question of the benamidar’s status became immaterial, and no final opinion on it was required. For the same reason, section 8(1) of the Act could not be invoked in favour of the appellant. Counsel also made clear during his arguments that he would not seek relief under the Agriculturists’ Relief Act if the high rate of interest allowed by the High Court were substantially reduced. This brings the discussion to the third point.

The stipulation that compound interest would be payable in case of default was held by both lower courts to be a penalty. Accordingly, the High Court should not have permitted interest at a rate of seventy-one percent compounded annually. The High Court apparently was misled by a passage in the trial judge’s judgment which stated that the original rate of interest was seven and one-half percent compounded annually. That statement is incorrect; the original agreement provided for interest at seven and one-half percent simple. The Court finds it appropriate that the mortgage money owed to the plaintiff should bear simple interest at seven and one-half percent per annum until the expiry of the redemption period, which the Court fixes as six months from the date of this order. Consequently, the appeal is allowed in part and the judgment of the High Court is modified. A preliminary decree shall be issued in favour of the plaintiff against defendant number six alone for a sum of rupees fifty-five thousand two hundred eighty-seven and odd annas, the sum to carry simple interest at seven and one-half percent per annum. Interest shall be calculated on rupees fifty-two thousand two hundred eighty-seven from the date of the mortgage, while on the balance of three thousand rupees interest shall accrue from 5 November 1930. No order is made as to the costs of this Court or of the High Court. The plaintiff shall be awarded his costs of the trial court. The appeal is allowed in part. The appellant was represented by an agent named M. S. K. Aiyangar and respondent number one by an agent named Ganpat Rai.