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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
Ms. M. R. Parkar, Insolvency Registrar present.
ORDER PRONOUNCED ON : 5th DECEMBER, 2023
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 31st March, 2016, the Petitioning Creditor sent demand notice to Judgment Debtor. On 3rd 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 9th 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 16th October, 2018 was issued which was sealed on 4th December, 2018. The Insolvency notice was served upon the Judgment Debtor on 8th 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 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 9th 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 5th 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 9th 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 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 2nd 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 19th August, 2022, order was passed to serve the said Petition upon the Judgment Debtor by three modes and service was completed. On 20th September, 2022 the Appeal that was filed against the dismissal of the Notice of Motion was dismissed for non-removal of office objections. On 3rd March, 2023, 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 9th 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 6th 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.
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 5th 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 13th 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 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 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 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 relates back to the date of commission of an act of insolvency i.e. 13th 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. Thakurdas[2], 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
LXXVII P.119 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
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) 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 judgmentdebtor 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 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 13th 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 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 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 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 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; (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.
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 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 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.
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 5th November, 2019 and has to be reckoned from 6th 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 04th 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 14th 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 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 5th 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 35th 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 5th 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.
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 16th October, 2018 pursuant to the said Consent Decree, which was sealed on 04th December, 2018 and served upon the Judgment Debtor on 8th December, 2018. The compliance period in the said notice was 35 days which ended on 12th 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 13th 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 23rd 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 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 5th 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, 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 subsection 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 14th January, 2019, (the website shows the filing date as 16th 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 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 9th 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 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 13th January, 2019, only then the submissions made on behalf of the Judgment Debtor could have made sense.
28. However, the facts of the present case are rather different. In the facts of this case, the act of insolvency was after the 35th day of the receipt of the Insolvency Notice i.e. on 13th 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.
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 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.
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. 13th January, 2019. A perusal 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 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 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 09th 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 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 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.)