Creditors Need Not Obtain Decree To File Claims Under Presidency Towns Insolvency Act: Bombay High Court

The Bombay High Court on Thursday held that a creditor does not need to obtain a decree before lodging a claim with the Official Assignee after a debtor is declared insolvent under the Presidency Towns Insolvency Act, 1909.

It ruled that the Official Assignee must independently examine every claim and decide whether to admit or reject it by recording reasons in writing.

Justice Jitendra Jain delivered the ruling while answering a reference on whether a creditor's claim must be supported by a decree before it can be considered by the Official Assignee.

"Therefore, in my view, a creditor need not be a decree holder for making a claim of his dues with the official assignee on the day the order of adjudication is passed against a debtor declaring debtor as an insolvent. On a reading of the Act as a whole along with the Schedule, Rules and Forms and the object of the insolvency proceedings, in my view, a creditor who has not initiated any legal proceedings on or before the date of the adjudication order can make a claim before the official assignee and the official assignee is statutorily required to examine the same independently before admitting or rejecting the claim and any such decision should be in writing, supported by reasons.", the court held.

The reference arose after the Official Assignee took the view that claims could not be considered unless they had first been adjudicated by a court or another competent authority. In January, the High Court framed the legal question on whether obtaining such a decree or adjudication order was mandatory before a creditor could lodge a claim.

After examining the scheme of the Presidency Towns Insolvency Act, the court concluded that no provision of the law requires a creditor to first obtain a decree before filing a claim before the Official Assignee.

The court also considered situations where proceedings against an insolvent are already pending before civil courts or specialised tribunals. It held that the Act contains no provision permitting those proceedings to be transferred to the Official Assignee for adjudication. Instead, they must continue before the forum that has jurisdiction.

"Merely because the proceedings may be pending across the country before various forums cannot be a ground to contend that the Insolvency Court or the official assignee should transfer the pending proceedings to itself and adjudicate the claim. This is not borne out from the Scheme of the Act. Therefore, the only harmonious way of reconciling would be that the creditor would inform the official assignee about their claim which on the date of adjudication order is pending before various forums and the official assignee would either keep aside certain amounts to be paid on the receipt of final order of the adjudication authority and will factor the said fact in calculating dividend for distribution.", the court ruled. 

The court observed that once the forum hearing the pending proceedings passes a final order, the creditor may inform the Official Assignee, who can then consider the claim while distributing the insolvent's assets.

The ruling also makes it clear that the Official Assignee is not expected to accept every claim at face value. The Official Assignee must independently verify each claim, examine the supporting material, and decide whether it should be admitted or rejected. If a claim is rejected, reasons must be recorded in writing.

Answering the reference, the court held that a creditor need not be a decree holder to lodge a claim before the Official Assignee and that such claims must be examined independently in accordance with the scheme of the Presidency Towns Insolvency Act.

For Insolvents: Advocates Gaurang Mehta, Rhea Mehta, Dipal Mehta, Aakash Desai, Sukanya Bhaumik

C. J. Bhatt, Official Assignee alongwith Subodh Patil, Deputy Official Assignee

R.V. Rane, Insolvency Registrar

Darshit K. Jain, Amicus Curiae.