P. Srinivasa Naicker vs Smt. Engammammal and Another

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 274 of 1959

Decision Date: 28 November 1961

Coram: K.N. Wanchoo, J.C. Shah

In this case the Supreme Court of India delivered its judgment on 28 November 1961. The matter was titled P. Srinivasa Naicker versus Smt. Engammammal and another. The opinion was authored by Justice K.N. Wanchoo, who sat on the bench together with Justice J.C. Shah. The petitioner was identified as P. Srinivasa Naicker and the respondents were Smt. Engammammal and an additional party. The citation for the decision is recorded as 1962 AIR 1141 and 1962 SCR Supl. (1) 690. The legal provision that formed the basis of the dispute was the Provincial Insolvency Act, 1920 (the fifth Act of 1920), specifically sections 59(a), 68 and 75, dealing respectively with the sale of an insolvent’s property by the official receiver, the power of a court to set aside such a sale, and the procedure for revision of orders under the Act.

The headnote of the report summarised the factual background. The official receiver had placed for auction the properties of an insolvent identified as N and his sons; these properties were burdened with mortgage liens. The auction concluded with the appellant being the highest bidder, and consequently the properties were transferred to him. The first respondent then filed an application under section 68 of the Provincial Insolvency Act. The Subordinate Judge entertained that application and set aside the sale on the ground that the price obtained at auction was excessively low. The matter was appealed to the District Judge under section 75. The District Judge, after considering the contentions, held that the price realised was not, in fact, low. The case subsequently proceeded to revision before the High Court, which, relying on the proviso to section 75, did not examine whether the District Judge’s order conformed to law. Instead, the High Court accepted an offer made by the first respondent and allowed the revision petition, thereby overturning the District Judge’s decision.

In its reasoning the Supreme Court held that the power conferred by section 68 is a judicial power and must be exercised according to well‑recognised legal principles. The Court emphasised that interference with the official receiver’s authority under section 59(a) may occur only when solid judicial grounds exist, such as proof of fraud, collusion between the receiver and the purchaser, or demonstrable irregularities in the conduct of the sale that could have depressed the price. The Court further explained that a court may set aside a sale only when the price is so low that it justifies refusing the sale at that amount. Accordingly, the High Court was required to determine whether the Sub‑Judge’s order was justified on any of these established grounds and whether the District Judge erred in law in reversing that order. The Court clarified that the High Court’s jurisdiction to intervene under the proviso to section 75 arises solely when it is satisfied that the District Judge’s order was not in accordance with law; only then may the High Court pass any appropriate order.

The judgment was rendered under civil appellate jurisdiction as Civil Appeal No. 274 of 1959. It was an appeal by special leave from the judgment and order dated 27 July 1956 of the Madras High Court in C.R.P. No. 90 of 1955. Counsel for the appellant were N.C. Chatterjee and R. Ganapathy Iyer, while counsel for the first respondent were K.N. Rajagopala Sastri, R. Mahalinga Iyer, and M.S.K. Aiyengar.

Counsel G. Gopalakrishnan appeared for the appellant, while K. N. Rajagopala Sastri, R. Mahalinga Iyer and M. S. K. Aiyengar appeared for respondent No. 1. The judgment was delivered on 28 November 1960 by Justice Wanchoo. This appeal was filed by special leave in an insolvency proceeding. The essential facts relevant to the present appeal are as follows. An application was made by Smt. Engammal, who is hereafter referred to as the respondent, against S. V. N. Nanappa Naicker and his sons. On the basis of that application the court adjudged the Naicker family insolvent. The insolvent party filed an appeal before the High Court of Madras, but that appeal was dismissed on 17 April 1953. After the dismissal the official receiver was directed to sell the property belonging to the insolvents. The property comprised two separate lots. The first lot consisted of dry land measuring 145 acres and 10 cents together with a masonry house. The second lot consisted of dry land of approximately 8 acres and a fraction thereof. Both lots were encumbered by mortgage. The official receiver fixed the auction date for the sale of both lots as 28 September 1953. On that day fifteen creditors were present at the auction, including the son of the respondent. No creditor made any request to postpone the auction, and the bidding proceeded. The highest bid received for lot 1 was Rs 4,500 and the highest bid for lot 2 was Rs 70. Both bids were submitted by the appellant, who is the brother‑in‑law of Nanappa Naicker. The total consideration of Rs 4,570 reflected the fact that the entire property was subject to a pre‑existing encumbrance of Rs 17,200. The official receiver, hoping that a higher offer might be forthcoming, did not close the sale on that day and instead postponed the auction to a series of later dates, the last of which was 26 October 1953. On each of those subsequent dates the respondent’s son attended, but no higher offer was made on the respondent’s behalf. On 26 October 1953 the respondent filed an application requesting that the sale be deferred for an additional three months, alleging that a prolonged drought in the area had depressed the market value of agricultural land. The official receiver declined to postpone the sale, observing that no superior offer had been received from the respondent and therefore proceeded to award the properties to the appellant. Subsequently, on 18 November 1953, the respondent filed another application under section 68 of the Provincial Insolvency Act, 1920 (the Act). The respondent contended that the sale had been conducted at an unreasonably low price, pointed out the ongoing drought in the village for several years, and highlighted the severe credit crunch in the money market. The respondent argued that a deferment of three to four months would enable the properties to fetch a price not less than Rs 15,000, exclusive of the amount due on the encumbrances.

The respondent filed a petition under section 68 of the Provincial Insolvency Act, asserting that the property had been sold for an inadequately low price and that a prolonged drought in the village, together with a severe shortage of money in the market, had depressed agricultural values. She argued that if the sale were deferred for three months she could offer more than Rs 7,500 for the properties. In addition, the petition contained allegations that the official receiver had colluded with the insolvent and with the appellant. Accordingly, the respondent prayed that the official receiver be restrained from completing the sale to the appellant at the price quoted by him. The application was opposed by both the official receiver and the appellant. The official receiver contended that he had acted diligently, that no higher bid could be secured, and he denied any allegation of collusion or irregularity in the conduct of the sale. The Subordinate Judge allowed the petition on the basis that the price realised was low and that the general body of creditors, to whom debts amounting to Rs 30,000 were owed, would suffer considerable prejudice if the sale were allowed to stand. Thus the sole ground for granting relief under section 68 was the alleged low price. The respondent then appealed to the District Judge under section 75 of the Act.

The District Judge set aside the Subordinate Judge’s order, observing that there was no evidence of any irregularity in the auction and no basis to conclude that the official receiver had been in collusion with the insolvent or the appellant. He noted that the respondent’s son had been present throughout the proceedings and that, had the respondent truly believed the price to be low, she could have made a higher offer herself. The District Judge further found that the Subordinate Judge was incorrect in his view that the property had been sold for a low price, providing several reasons for his conclusion. The case was then taken in revision under the proviso to section 75, which authorises the High Court to call for the case and pass such order as it thinks fit for the purpose of ensuring that the District Court’s decision was according to law. The High Court, however, did not address directly whether the District Judge’s order was legally correct. Prior to the High Court hearing, the respondent offered to deposit Rs 9,000 for a fresh auction and to commence the bidding at that amount, also offering to pay Rs 1,000 to the appellant for any loss he might suffer. The High Court accepted this offer, although it expressed the view that the original auction price could not be described as unconscionably low. Nonetheless, the Court held that, considering the extent and nature of the properties, the price was low and that obtaining Rs 9,000 or more would result in a substantially larger dividend to the creditors. Accordingly, the High Court allowed the revision on the terms proposed by the respondent.

The High Court held that, given the extent and nature of the properties in question, the price obtained at the auction was low, and that if an amount of nine thousand rupees or more could be realised, the creditors would obtain a substantially larger dividend. Accordingly, the High Court allowed the revision on the terms proposed by the respondent, namely the deposit of nine thousand rupees and a minimum bid of the same amount. The order issued by the High Court has been placed before this Court on a special leave of appeal. The sole contention raised on behalf of the appellant is that the High Court possessed no jurisdiction to interfere with the order of the District Judge unless it was satisfied that the District Judge’s order was not in accordance with law. The appellant argues that the High Court’s order does not demonstrate that the Court examined whether the District Judge’s order complied with law, and that the High Court appears to have been swayed by the respondent’s offer to set a minimum bid of nine thousand rupees for the properties. It is further pointed out that the respondent’s offer was made three years after the original auction, and that the timing of the offer does not necessarily indicate that the price obtained at the 1953 auction was inadequate, because market prices could have risen during the intervening three‑year period.

In contrast, the respondent contended that the court’s power under section 68, when entertaining an appeal from an act of the receiver, is considerably broader than the power exercised by a court in ordinary auction sales in execution proceedings. Accordingly, the respondent maintained that the Subordinate Judge was correct in setting aside the receiver’s act of transferring the properties to the appellant, and that the High Court was therefore justified in setting aside the District Judge’s order and reinstating the Subordinate Judge’s decision. It may be accepted that the power conferred by section 68 is not limited by the considerations that apply in ordinary execution‑sale cases. Nevertheless, the power under section 68 is a judicial power and must be exercised in accordance with well‑recognised principles that justify interference with an act that the receiver is authorised to perform under section 59(a) of the Act. The fact that the receiver’s sale under section 59(a) is subject to supervisory control by the court under section 68 does not permit the court to arbitrarily overturn a sale that the official receiver has lawfully executed. The court is required, in insolvency proceedings, first to consider the interest of the general body of creditors, then the interest of the insolvent, and finally, where a sale has been effected by the official receiver, the interest of the intended purchaser. Even so, the official receiver’s decision to approve a sale should not be set aside unless there are sound grounds for interfering with the discretion exercised by the receiver.

In this case the Court explained that the official receiver could be compelled to set aside a sale only on recognised judicial grounds, and that those grounds could be broader than the reasons traditionally allowed in auction sales that arise in execution proceedings. The Court stressed that any interference by the court must be based on specific judicial reasons. For example, the Court said that a sale could be set aside if there was proven fraud or collusion involving the official receiver, the insolvent, or the prospective purchaser. A further ground for interference could be the presence of irregularities in the way the sale was conducted, especially if such irregularities might have influenced the price obtained. The Court also indicated that even in the absence of fraud, collusion, or procedural irregularity, the court could intervene where the price realised at sale was unreasonably low, making it appropriate to prevent the property from being transferred at that amount. The Court noted that such reasons, and any other circumstances particular to the facts of a case, might justify the court’s interference with a sale made by the official receiver under section 59(a) of the Insolvency Act. Accordingly, the High Court was required to examine whether the Subordinate Judge’s order to set aside the sale was founded on any of these permissible grounds, and whether the District Judge erred in law when he reversed that order. The Court observed that if the Subordinate Judge’s order was not supported by the recognized grounds, or if the District Judge’s reversal was legally sound, then the High Court could not intervene under the proviso to section 75, because its jurisdiction to revise arises only when it is convinced that the District Judge’s order is contrary to law. Should the High Court reach that conclusion, it would be free to pass any order it deemed appropriate. The Court then turned to examine the Subordinate Judge’s reasoning. Both the Subordinate Judge and the District Judge had found no evidence of fraud or collusion by the official receiver in the present matter. Moreover, the Subordinate Judge had not identified any irregularity in the conduct of the sale, and the District Judge expressly confirmed the absence of such irregularities. The sole basis on which the Subordinate Judge sought to set aside the sale was that the price obtained was too low. The Court explained that if this ground were justified, the Subordinate Judge’s interference would have been proper. However, the District Judge had examined this issue and concluded that there was no basis to allege that the properties were being sold at an unduly low price. In assessing the price, the Subordinate Judge observed that the insolvent had initially valued the properties at Rs 80,000, while acknowledging that this figure was clearly an exaggeration. Consequently, the Subordinate Judge did not accept the Rs 80,000 valuation as reflecting the true worth of the properties.

The Subordinate Judge concluded that the properties should be valued at a minimum of Rs. 40,000, and he based that conclusion on the fact that the properties had been mortgaged for more than Rs. 20,000 in the year 1936. He appeared to rely on an assumption that there existed an infallible rule requiring the mortgage amount to be doubled in order to arrive at the proper valuation of the mortgaged property. The District Judge, and rightly so, pointed out that no such rule could exist. Consequently, the primary foundation on which the Subordinate Judge held that the properties were worth Rs. 40,000 and that the appellant’s bid was therefore low was undermined by the District Judge’s observation. The Subordinate Judge also noted that, during the pendency of the insolvency appeal, the insolvents remained in possession of the properties and had deposited Rs. 2,000 each year pursuant to an order of the High Court in order to retain that possession. However, the Subordinate Judge did not calculate the value of the properties by using the annual income of Rs. 2,000, and he was correct in refraining from doing so, because a payment made by a litigant under a court order to retain possession does not necessarily reflect the actual annual income generated by the property. This leads to the conclusion that the District Judge was correct in holding that the record contained no evidence that would justify the Subordinate Judge’s finding that the sale price obtained in this case was inadequate or unreasonable. It is also relevant to note that the respondent could have presented to the Subordinate Judge recognised methods of valuation to demonstrate the true value of the properties. Having done so, the Subordinate Judge should have considered the total amount of encumbrances affecting the properties. The mortgage deed was not part of the record, and the interest, if any, attached to the mortgage money was unknown. Before the Subordinate Judge could deem the appellant’s price low, he first needed to determine the property’s value using an accepted valuation method and then ascertain the total encumbrance on the properties. If, after making those determinations, the gap between the value and the encumbrance was substantially greater than the appellant’s bid, the Subordinate Judge would have been justified in interfering with the official receiver’s order, even in the absence of any fraud, collusion or irregularity. No such findings were made by the Subordinate Judge, and the District Judge was therefore correct in stating that the Subordinate Judge’s view that the price fetched was inadequate and unreasonable was incorrect. Moreover, the High Court failed to address whether the District Judge’s order complied with law, appearing to be influenced merely by the respondent’s offer.

In this case the Court observed that the High Court had concentrated on the offer made by the respondent, but it had ignored the fact that the respondent’s minimum bid of Rs 9,000 and the appellant’s bid of Rs 1,000 were made three years after the auction, a period during which, as far as the record shows, market prices could have risen. The Court further noted that the High Court had remarked that the appellant’s price was not unconscionably low, yet it felt that the price remained low when compared with the respondent’s offer in 1956. The Court pointed out that the High Court had not examined the question of whether the order of the District Judge was in accordance with law, and that it had not concluded that the order was illegal. Because the High Court had not addressed that legal question, the Court held that the High Court possessed no jurisdiction to interfere with the District Judge’s order.

The counsel for the respondent argued that even though the High Court might not have considered that particular aspect, the present Court should not disturb the High Court’s order if it was satisfied that, in the circumstances of 1953, the appellant’s price was indeed low. The Court agreed that, had it been possible to determine that the appellant’s price was low, there would have been no reason to interfere with the High Court’s decision, even though the High Court might not have fulfilled the requirements for interference under the proviso to s. 75. However, the Court reiterated that the record contained no sufficient material on which to conclude that the appellant’s price was low. The Court emphasized that, as previously pointed out, the Subordinate Judge’s court had made no attempt to value the properties by any recognised valuation method, nor had it shown the total encumbrance on the property. Without a proper valuation and a determination of encumbrance, it was impossible to say that the appellant’s offer was low, because that assessment depended on the difference between the property’s value and the amount of encumbrance.

In these circumstances the Court could not hold that the District Judge’s order, which found that the Subordinate Judge was wrong in deeming the price fetched inadequate or unreasonable, was contrary to law. Accordingly, the Court allowed the appeal, set aside the order of the High Court, and restored the order of the District Judge. The Court also ordered that the appellant would be awarded costs in this Court, to be paid by the first respondent. The appeal was therefore allowed.