Kaushal Kishore And Ors. vs Ram Dev And Ors.

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 24 May 1957

Coram: S. Jafer Imam, P.B. Gajendragadkar, A.K. Sarkar

In this matter the Supreme Court noted that the procedural history had taken an unusual turn because both courts of appeal below had misunderstood the factual determination made by the trial court. The dispute originated from an application filed on or about 19‑May‑1950 seeking to have certain individuals, hereinafter referred to as the debtors, declared insolvent. The petition was presented by some of the respondents in their capacity as creditors of a joint family that the debtors were alleged to have formed. The family relationships among the debtors were illustrated by a genealogical chart showing Bhowani Ershad (appellant No 4) as the patriarch, with his sons Bhola Shankar, Shiv Shankar and Rama Shankar (also known as Nanna Mal, who died in 1936). From these three descended Kaushal Kishore (appellant No 1), Brij Kanwar (appellant No 2) and Kanwar Kishore (appellant No 3). The petition asserted that the joint family operated three distinct businesses identified as Bhowani Pershad‑Nanna Mal, Bhowani Pershad‑Shiv Shankar and Rama Electric Works. According to the petition, Bhowani Pershad acted as the karta of the family, while the remaining members served as karkuns or managers of the enterprises. The petition enumerated five alleged acts of insolvency, but the courts below considered only the first of these, finding that the remaining four had not been substantiated. The first alleged act of insolvency was expressed in the petition as follows: “The respondents have for about the last one month absolutely stopped payment of debts and have informed all the creditors severally as well as jointly of this fact.”

The petitioners attempted to prove this alleged act by calling witnesses who would testify that on 18‑April‑1950 a group of creditors together with other persons had approached Bhowani Pershad and Shiv Shankar demanding payment of their dues. The witnesses purported to say that the two defendants responded that they possessed no money, were unable to make any payment and that the creditors were free to act as they saw fit. The trial court, after evaluating the evidence, expressed disbelief that such a meeting had ever taken place and determined that no proof existed that the debtors had issued any notice of suspension of payment of their debts. The trial judge further observed, “Even if it be assumed for the sake of argument that Shiv Shankar had stated that he had no money at the time when the demand was made, it does not amount to an act of insolvency.” Consequently, the trial court concluded that the facts alleged in the petition were not proved, and even assuming they were proved, they would not constitute a notice of suspension of payment within the meaning of the relevant statutory provision. Accordingly, the trial court dismissed the petition for insolvency.

The Court noted that the trial judge had held that the alleged conduct could not be regarded as a notice of suspension of payment of debts within the meaning of Section 6(3) of the Provincial Insolvency Act, and therefore it did not constitute an act of insolvency. Acting on that view, the trial Court dismissed the petition filed on the ground of insolvency. The petitioning creditors appealed the decision to the District Judge of Karnal at Gurgaon. From the judgment of the learned District Judge it emerged that he was of the opinion that the trial Court had accepted the evidence presented by the petitioners regarding the alleged act of insolvency, but had nevertheless dismissed the petition because, in his view, the evidence demonstrated only a declaration of inability to pay and not an act of insolvency under the statute. The District Judge examined the question of law and concluded that the trial Court had erred in its legal interpretation and that the facts, as he understood them to have been found by the trial Court, did amount to an act of insolvency within the statutory definition. The Court observed that the District Judge’s conclusion was based on a mistaken assumption that the trial Court had found the incident of 18‑April‑1950, as described by the petitioners, to be established. In reality, the trial Court had reached the opposite conclusion, holding that the incident had not been proved. The matter was subsequently taken to the High Court at Simla by Kaushal Kishore and the other debtors. The High Court, according to the record, failed to notice the error made by the District Judge. In its judgment the High Court reiterated the view that “The Insolvency Court held, that the words used by these respondents did not amount to an act of insolvency and that mere inability to pay or refusal to pay was not an act of insolvency.” The Court pointed out that this statement was itself erroneous because the trial Court had not found that the debtors had used any words at all. Consequently, the High Court fell into the same factual mistake as the District Judge concerning the trial Court’s findings. Nevertheless, the High Court examined various portions of the evidence and concluded that the evidence established facts which, in law, amounted to a notice of suspension of payment of debts, thereby constituting an act of insolvency. On that basis the High Court affirmed the order of the District Judge.

Following the High Court’s decision, Kaushal Kishore, Brij Kanwar, Kanwar Kishore and Bhowani Pershad filed an appeal before this Court, obtaining leave under Article 136(1) of the Constitution. Counsel for the appellants argued that the evidence led by the petitioning creditors failed to establish any of the factual premises that the petitioners claimed. He emphasized that the trial Court, which had examined the evidence, did not believe the witnesses called by the petitioning creditors, and that the court of first appeal had not independently examined the facts but proceeded on an incorrect impression that the trial Court had accepted the evidence. The counsel maintained that both of these contentions were correct, and that, as a result of the High Court’s reliance on the same misunderstanding, its examination of the evidence was also affected. Accordingly, the counsel urged this Court to scrutinise the evidence afresh.

The Court observed that the trial judge had not accepted the testimony of the witnesses presented by the petitioning creditors, and that the appellate court had not undertaken its own examination of the facts but had proceeded on the mistaken assumption that the trial court had relied upon the evidence. Both of these observations were agreed to be correct by the counsel for the appellants, and the Court concluded that, for the reasons previously explained, the High Court shared the same misconception as the District Judge. This shared error had inevitably influenced the way the High Court examined the evidence, and therefore the Court found it necessary to evaluate the evidence directly.

The factual matter that the petitioning creditors sought to prove concerned an incident alleged to have taken place on 18‑4‑1950. According to the creditors, on that date a group consisting of Mohan Lal, Gujjar Mal, Nand Kishore, Ram Dev, Murari Mal and several others approached the shop owned by Bhowani Pershad and Shiv Shankar. The creditors claimed they demanded payment of sums owed to them, and that Shiv Shankar and Bhowani Pershad responded by stating that they possessed no money and would not make any payment, adding that the creditors could do as they wished. The central question was whether this incident actually occurred.

The first witness presented by the petitioning creditors on this point was Phul Chand, son of Kidar Nath, who gave evidence on 4‑5‑1951. He testified that his wife's brother, Umrao Singh, was a creditor of the debtors and that about a year earlier he had made a demand to the debtors but received no response. He did not identify which debtor he had addressed, nor did he state any reply from the debtors to his demand. Consequently, his testimony did not establish the specific statements alleged to have been made by Bhowani Pershad and Shiv Shankar. Moreover, he did not indicate that anyone else was present when he made the demand. The trial judge noted that this witness was an interested party, and there is no indication that this observation was unwarranted. The High Court, however, misinterpreted his evidence, suggesting that he had reported being told by the debtors that they would not pay. In fact, the witness merely said that “the respondents are not making payment to the creditors nowadays,” meaning that at the time he was testifying—approximately one year after the alleged incident—the debtors were not paying their creditors. This statement did not imply that the debtors had communicated a refusal to pay at the time of the alleged encounter. The Court also agreed with the appellants' counsel that there was no cross‑examination of this portion of his evidence, and that the lack of cross‑examination did not substantiate the incident in question.

The Court observed that the testimony of the first witness did not, in its view, establish any of the facts upon which the petitioning creditors based their claim. It was noted that counsel for the petitioning creditors themselves admitted that this witness was not addressing the alleged incident that was said to have occurred on 18‑4‑1950. The subsequent witness called by the petitioning creditors also bore the name Phul Chand, but he was identified as the son of Sham Sunder. This Phul Chand recounted that in April 1950 he, together with Mohan Lal, Gujjar Mal, Nand Kishore, Ram Dev and Murari Mal, proceeded to the shop known as Bhowani Pershad‑Shiv Shankar and demanded payment from Shiv Shankar. According to his account, Shiv Shankar replied that he possessed no money at that time and told the creditors that they could act as they wished. The witness further stated that he held the position of Chaudhry of the Anaj Mandi at Rewari and was a member of the Trade Conciliation Committee of that locality. The trial Judge characterised this witness as a man of ordinary status who did not appear to be beyond approach or corruption, and the Court found no material on the record to contradict that observation. However, the Court pointed out that the incident described by this witness could not have occurred if the earlier testimony of the other Phul Chand were correct, because the latter had asserted that the shop of Bhowani Pershad‑Shiv Shankar had been closed for six years prior to May 1951. Notably, the second Phul Chand did not mention the presence of Bhowani Pershad in his narrative.

The evidence then proceeded to the testimony of Balmukand, who similarly asserted that several individuals went to make a demand for payment and that Shiv Shankar replied that he had no money at that time and that the creditors could do as they pleased. Balmukand emphatically stated that Bhowani Pershad was not present when the demand was made, a point that the High Court had mistakenly interpreted as indicating Bhowani Pershad’s presence. The next witness, Gujjar Mal, contradicted Balmukand by claiming that when the party approached Shiv Shankar for payment, both Bhowani Pershad and Shiv Shankar were present, and each said they possessed no money and would not pay. Following this, the witness Budh Ram merely reported that the opposite party refused to make the payment and said they would not pay the amount. The final witness, Ram Dev, gave testimony of the same general effect. Upon considering the cumulative evidence, the Court concluded that it could not be said that any demand had been made on Shiv Shankar or Bhowani Pershad, nor that they had declared they had no money or would not pay, nor that the creditors were told they could act as they wished. The witnesses were inconsistent regarding the presence of Bhowani Pershad and the feasibility of approaching the shop of Bhowani Pershad‑Shiv Shankar. Consequently, the Court held that the petitioning creditors had failed to prove that any demand was made, that any refusal was expressed, or that the debtors were insolvent.

The Court examined the evidence concerning Pershad and Shiv Shankar, focusing on whether the shop was open or closed at the relevant time and on which individual made each alleged statement. It noted that the two witnesses who testified last failed to specify to whom the demand for payment was addressed nor to identify the person who replied to that demand. Consequently, on the basis of this incomplete testimony, the Court held that it could not lawfully declare any of the parties insolvent. This conclusion was reinforced by the manner in which the petition alleged that a notice of suspension of payment of debts had been given; the petition did not record any specific incident occurring on a particular date, nor did it name the person who purportedly uttered the words that would amount to an act of insolvency. The phrasing of the petition therefore suggested that the creditors were asserting that a month‑long notice of suspension had been issued, a scenario that could not be sustained if the factual account given by some witnesses were accurate. Accordingly, the Court determined that the petitioners had not proved that the debtors had made any declaration that they were suspending payment of their debts, and it allowed the appeal on that sole basis. Because the alleged statement was not established, the Court found that the question of whether, if proved, such a statement would constitute an act of insolvency did not arise. Likewise, the Court saw no need to revisit the earlier consideration of whether, due to a family partition, only Shiv Shankar could be adjudged insolvent. In the final analysis, the Court set aside the earlier order declaring the debtors insolvent in its entirety and granted costs of the appeal to the appellants.