Kiran Raj

The Supreme Court Division Bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar allowed appeals restoring a 2004 order of the Additional District Judge, Bellary, which had invalidated a transfer of a partner’s share in a firm during insolvency proceedings under the Provincial Insolvency Act, 1920. The Court clarified the effect of annulment of insolvency proceedings on transactions carried out during the insolvency period, holding that such transactions cannot be automatically protected under Section 37 of the Act unless they were duly concluded and attained finality. It held the alleged pre-insolvency agreement was fabricated and unenforceable.

The dispute concerned the ownership of a one-anna share in the partnership firm M/s Gavisiddheshwara & Co. A partnership was originally constituted in 1963 with specified profit-sharing ratios. After reconstitution in 1974, one partner retired and his share was purchased by another partner, increasing the latter’s stake. The father of the present appellant died in February 1975 and the appellant was inducted as a partner. The appellant’s family faced heavy debts, and it was alleged that the appellant offered in March 1975 to sell his one-anna share to any willing partner.

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The opposing party claimed to have accepted this offer and to have agreed to pay approximately ₹95,000. Meanwhile, creditors of the appellant initiated insolvency proceedings under the Provincial Insolvency Act, 1920. In June 1977 the District Court declared the appellant and his mother insolvent and appointed an official receiver to manage their assets.

In August 1977 an application was filed before the District Court under Sections 4 and 5 of the Act seeking a direction to the receiver to accept payment of ₹95,000 and transfer the one-anna share. This application was allowed in January 1983 and a transfer deed was executed in March 1983 by the receiver in favour of the applicant. The appellants challenged this order before the High Court, which stayed its operation.

Subsequently, in April 1996, the District Court annulled the insolvency under Section 35 of the Act after finding that debts were discharged. In February 1997 the High Court set aside the 1983 order and remanded the matter for reconsideration. On remand, the District Court in February 2004 dismissed the application for transfer, declared the alleged 1975 offer as fabricated, and ordered cancellation of the 1983 deed.

Appeals were filed before the High Court, which in February 2011 reversed the District Court’s decision, holding that the transfer during insolvency was protected under Section 37 of the Act. The matter reached the Supreme Court in the present civil appeals. The statutory provisions involved included Sections 4, 5, 35, 37 and 55 of the Provincial Insolvency Act 1920, and relevant procedural provisions under the Code of Civil Procedure.

The Supreme Court observed that “it is only upon a conclusion that the transactions and orders of the court and the receiver are valid and attained finality that the property shall not revert to the debtor upon annulment of adjudication under Section 37 of the Act.”

The Court recorded that the High Court “committed an error in ignoring the fact that, by virtue of its earlier order dated 13.02.1997, the order dated 04.01.1983 allowing I.A. No. XV was set aside, and I.A. No. XV was remanded for reconsideration. As a consequence, the transfer deed dated 11.03.1983 had no legs to stand.”

It further observed that the High Court “failed to analyse the findings of the Trial Court with respect to the alleged evidence under Exs.P4 to P7. In fact, there is no analysis by the High Court about Exs.P4 to P7. The High Court simply proceeded on the premise that the order dated 04.01.1983, coupled with the execution of the transfer deed having become final, the appellants are bound by the transaction.”

The Bench stated that “for operation of Section 37, it is fundamental that there must in fact be a finality of transactions. In other words, there must be conclusion of sales, dispositions of property and/or the payments made in that regard. Section 37 proceedings cannot partake the character of a civil court deciding a suit for specific performance of an agreement.”

The Court also recorded: “the transfer deed dated 11.03.1983 was executed on the basis of the order passed by the District Court on 04.01.1983. When the said order dated 04.01.1983 is set aside and the matter is remanded back to the District Court for reconsideration… the High Court was not justified in reversing the findings of the District Court on the ground that the transfer deed remained unchallenged.”

On appellate standards, it referred to earlier precedent and noted: “while reversing a finding of fact the appellate court must come into close quarters with the reasoning assigned by the trial court and then assign its own reasons for arriving at a different finding. This would satisfy the court hearing a further appeal that the first appellate court had discharged the duty expected of it.”

The Supreme Court stated: “Having considered the matter in detail, we have no hesitation in holding that the High Court committed a serious error in reversing the findings of the District Court in its judgment. If the judgment of the District Court is upheld, the appeals filed by the purchaser does not survive.”

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“We thus allow the Civil Appeal Nos. 12048-12049 of 2018 against the judgment and order passed by the High Court in M.F.A. No. 2873 of 2004 c/w M.F.A. No. 2706 of 2004 dated 25.02.2011 and restore the judgment and order passed by the Additional Judge Bellary in I.A. No. XV in I.C. No. 2/75 c/w Ms. C. No. 5/2000 dated 16.02.2004.”

“For the same reasons, we dismiss the Civil Appeal Nos. 12050-12053 of 2018.”

Advocates Representing the Parties

For Appellant(s): Mr. Basava Prabhu S. Patil, Sr. Adv. Mr. Abdul Azeem Kalebudde, AOR Mr. ADN Rao, Sr. Adv. Mr. Annam Venkatesh, AOR Mr. Rahul Mishra, Adv. Ms. Agrimaa Singh, Adv. Mr. Satyarth Singh, Adv.

For Respondent(s): Mr. V. N. Raghupathy, AOR Mr. ADN Rao, Sr. Adv. Mr. Annam Venkatesh, AOR Mr. Rahul Mishra, Adv. Ms. Agrimaa Singh, Adv. Mr. Satyarth Singh, Adv. Mr. Basava Prabhu S. Patil, Sr. Adv. Mr. Abdul Azeem Kalebudde, AOR

Case Title: SINGAMASETTY BHAGAVATH GUPTHA & ANR. VERSUS ALLAM KARIBASAPPA (D) BY LRS./ALLAM DODDABASAPPA (D) BY LRS. & ORS
Neutral Citation: 2025 INSC 1159
Case Number: Civil Appeal Nos. 12048-12049 of 2018 with 12050-12053 of 2018
Bench: Justice Pamidighantam Sri Narasimha, Justice Atul S. Chandurkar