GARVIN S.P.J.—Raman Chetty v. Allopatham.
1932Present: Garvin S.P.J. and Drieberg J.
RAMAN CHETTY v. ALLOPATHAM et al.
376—D. C. Colombo, 40,323.
Insolvency—Deed of composition—Secret agreement to pay more than theirshare to some creditors—Deed not binding on others.
Where, in insolvency proceedings, the insolvent has entered into adeed of composition with his creditors whereby they agreed to accept acertain, proportion of their claims in full satisfaction thereof,—
Held, that a creditor, who has executed the deed of composition, isentitled to repudiate it if he discovers that the others have been inducedto execute the deed by means of a secret bargain for a payment to themin excess of the composition.
A PPEAL from a judgment of the District Judge of Colombo.
H. V. Perera, for plaintiff, appellant.
Hayley, K.C. (with him Gratiaen), for the defendants, respondent.
Cur. adv. vult.
November 9, 1932. Garvin S.P.J.—
This was an action on two promissory notes both made by the defend-ants, each for a sum of Rs. 1,000. One note was made on May 17, 1929,and the second on July 6, 1929. The plaintiff gave the defendants creditfor payments amounting to Rs. 425 and claimed judgment for the balanceprincipal sum of Rs. 1,575 and interest. The first defendant pleadedthat he had been adjudged an insolvent in certain proceedings No. 4,082of the District Court of Colombo, and that he entered into an arrangementwith his creditors as a result of which they agreed to accept a compositionof 25 per cent, of their several claims in full satisfaction. The deed ofcomposition was produced in the insolvency proceedings and upon theapplication of the insolvent to which the provisional assignee agreed,the insolvency was annulled. The first defendant takes his stand uponthe deed of composition and pleading that he has in terms thereof paidto the plaintiff the sum of Rs. 502 being 25 per cent, of his claim praysthat the plaintiff’s action be dismissed. The second defendant pleadedthat at the time of the making of these notes it was agreed and understoodthat he was not to be held liable on them or either of them. The plaintifffiled a replication in which he pleaded that the deed of composition wasof no effect and void in law for the reason that the plaintiff had procuredthe signature of several of the creditors to this deed of arrangement uponthe promise of paying them something additional to the sum which theywould have received if the deed of composition had been faithfully adheredto. Three issues were framed at the trial. The first related to thefirst defendant’s answer and the plaintiff’s plea in reply that the deedof composition no longer bound him; the second was an issue as to theamount which had been paid by the first defendant to the plaintiff; andthe third was an issue raised upon the second defendant’s plea that theplaintiff had assured him that at the time of the signing-of these promissorynotes that he would not hold him liable to pay the same.
GARVIN S.P.J.—Raman Chetty v. Allopatham.
The learned District Judge has found as a fact that the first defendantdid not pay to the plaintiff the sum of Rs. 502 as alleged by him.
He accepts the evidence that all he has received is two sums of Rs. 250and Rs. 175 amounting in the aggregate to Rs. 425. As to the seconddefendant, there are indications in his judgment that he does not acceptthe suggestion that it was understood that as the joint maker of thesepromissory notes he was incurring no liability to the plaintiff. On theprincipal issue in the case, the District Judge has held very definitelythat several of the creditors and in particular the 'firm of N. R. M. M.received money or other advantages and were induced thereby to enterinto the deed of composition.
The evidence of the second defendant can leave no doubt whateverthat the District Judge was right. He said “ My father (first defendant)had about 30 creditors. About 8 or 10 of them wanted something morebefore they signed. In order to get them to sign I made them promises.Each man did not know what I was promising the other man. I madeeach person believe that all the others were accepting, except himself.When the people signed they signed on the assumption that all werewilling ”. There can be no doubt, therefore, that this is a case in whichthese 8 creditors who were unwilling to enter into this deed of compositionwere bribed to do so by special inducements which placed them in aposition of advantage as compared with the rest of the creditors whowere given the assurance when they were invited to enter into this deedthat every creditor would be treated upon the same basis and each ofthem only received payment at the rate of 25 per cent, of the amount oftheir claims.
*• The essence of composition arrangement between a debtor and hiscreditors is equality between the creditors and consequently a creditorwho has executed & composition deed is entitled to repudiate it if heafterwards discovers that other creditors have been induced to executethe deed by means of a secret bargain for a payment to them in excess ofthe composition ”—see In re Milner.1
Thus far the evidence in the case and the findings of the learned DistrictJudge thereupon justify the plaintiff in the attitude he has adopted.But the learned District Judge has proceeded further and has deprivedhim of the right to repudiate the agreement upon the ground that hewas himself one of those persons who received a special inducement overand above what was due to him under the deed of composition in orderthat he might give his assent to the arrangement. The District Judge’sfinding is not a very definite one. To quote his own words, they are asfollows: —
“ I think the arrangement was that the plaintiff should have roughlyabout 50 "per cent, of his claim. The idea was that he should realizeon the two promissory notes, which amounted to Rs. 627, and be paida further sum of Rs. 175 which would make about Rs.. 800 for him ”.Now there is no one who says that there was any arrangement by whichit was agreed that the plaintiff was to receive 50 per cent, of his claim
• (1885) 15 Q. B. D. 605.
GARVIN S.P.J.—Raman Chatty v. Allopatham.
unlike the other creditors who were to receive only twenty-five. Thetwo promissory notes referred to by the learned District Judge havebeen shown to have been handed to the plaintiff at a date long anteriorto the insolvency and this deed of composition. It would seem thatthe first of these two promissory notes was dishonoured on July 29, andon that date the defendants met the plaintiff and the seconddefendant endorsed two promissory notes, one for Rs. 400 and the otherfor Rs. 227, and handed them over to the plaintiff. It is not quite clearwhether this was done in order that the plaintiff should have somethingin the nature of security for his debts or whether it was to be treated asa conditional payment pro tanto of the debt due upon the promissorynotes. But whichever may be the true explanation it is clear that theywere handed over at a totally different time and under circumstanceswhich render it impossible to treat the act of the second defendant inendorsing and handing these notes over as part of an arrangement madelong subsequent thereto at the time of the deed of composition with theintention of inducing him to come in with the rest of the creditors. Thesecond defendant when giving evidence put his case upon a somewhatdifferent footing. He stated that he gave the plaintiff a stamped agree-ment to pay him something more. -The District Judge does not dealspecifically with this evidence and it seems extremely unlikely that suchan agreement was drawn up, signed, or delivered to the plaintiff. Proceed-ing, he stated “ The agreement was merely that I should pay him some-thing more. Apart from this I gave him a note. It was for Rs. 227. Apartfrom this I endorsed a note in my favour by a third party. There wasa balance of Rs. 400 due on a Rs. 1,000 note which I endorsed to theplaintiff. This was to be held in security until the fulfilment of theagreement. ” Now so much of the evidence as refers to the endorsementand delivery of these notes clearly cannot be accepted, for, as the DistrictJudge has himself pointed out, the endorsements are dated and the dateupon them is July 29, 1929. One cannot therefore accept the seconddefendant’s evidence that they were endorsed in pursuance of anyagreement made at or about the time at which this deed of compositionwas signed.
There is therefore no evidence that the plaintiff was himself one ofthose who had in fraud of the other creditors received a special advantageor benefit to himself as an inducement for entering into this deed ofcomposition. In the absence of such evidence he – is clearly entitled torepudiate the deed of composition and make his claim upon the twopromissory notes.
The learned District Judge has proceeded to consider whether if thedeed of composition be treated as a good one and binding upon theplaintiff the second defendant was not in law released from his obligationson the promissory • notes. In view of the conclusion at which I havearrived it is unnecessary to deal with the arguments which wereaddressed to us upon this aspect of the case.
The plaintiff is in my judgment entitled to a decree in his favour asprayed for, save only that he must give the defendants credit for thesum of Rs. 400 due upon the promissory note which was endorsed by the
GARVIN S.PJ.—Raman Che tty v. AUopatham.
second defendant and handed to him on July 29, 1929. As regardsthe other note for Rs. 227 the parties seem to be agreed that this amountis irrecoverable. We would therefore direct that this note be handedover to the defendants.
The judgment of the District Judge will therefore be set aside andjudgment entered for plaintiff as directed with costs in both Courts.
Drif-berg J.—I agree.
RAMAN CHETTY v. ALLOPATHAM et al