Attempt To Transfer Property To Defeat Creditors Not 'Act Of Insolvency' Under Provincial Insolvency Act: Madras HC

The Madras High Court at Madurai recently held that an attempt by a debtor to transfer property to defeat creditors may justify attachment before judgment under Order 38 of the Code of Civil Procedure (CPC). However, such an attempt by itself does not amount to an “act of insolvency” under Section 6 of the Provincial Insolvency Act, 1920.

“Attempting to transfer one's property to defeat the interest of the creditors can be a good ground for attaching the property before judgment under Order 38 of CPC. However, it is not an act of insolvency within the meaning of Section 6 of the Provincial Insolvency Act, 1920,” Justices G.R. Swaminathan and M.D. Sumathi observed.

The court allowed an appeal filed by Jahir Ussain against the December 18, 2025 order of the II Additional District and Sessions Court, Thanjavur. The trial court had allowed the insolvency petition and directed the properties mentioned in it to be sold in public auction, with the sale proceeds to be used for repayment.

U.A. Rahman Batcha, Mehraj Nisha and other creditors had approached the Thanjavur court, seeking to have Jahir Ussain and other persons involved in the insolvency proceedings declared insolvent.

The petitioning creditors alleged that amounts received under financial transactions had not been repaid. They also alleged that Jahir Ussain was attempting to alienate his properties.

Before the High Court, Jahir Ussain's counsel argued that a creditor cannot maintain an insolvency petition unless the debtor had committed an act of insolvency covered by Section 6 of the Act.

The court examined the requirements under Section 9(1), which governs insolvency petitions filed by creditors. It noted that the provision uses the word “and”, making all three conditions under clauses (a), (b) and (c) mandatory.

One of those conditions is that the act of insolvency relied upon must have occurred within three months before the petition was filed. The court observed that without an act of insolvency, a creditor's petition under Section 9 cannot be maintained.

When the court asked the contesting creditors to identify the alleged act of insolvency, their counsel pointed to Jahir Ussain's attempt to alienate his properties.

The court pointed out that Section 6(a) to (c) uses the expression “makes a transfer”. It held that the provision does not cover an attempt to transfer property or even an agreement to transfer it.

“Section 6 is not about attempts to transfer of property. It is not even about agreement to transfer the property,” the bench observed. It held that Section 6 can be attracted only when the debtor conveys a right in the property to another with the intention of defeating the interests of creditors.

The court therefore held that an attempt to transfer property may support an application for attachment before judgment under Order 38 CPC. It does not, by itself, constitute an act of insolvency under Section 6 of the Provincial Insolvency Act.

The bench also rejected the trial Judge's reliance on the financial transactions and the failure to repay the amounts. It held that non-repayment by itself could not sustain the insolvency proceedings.

“Failure to repay by itself will not constitute an act of insolvency. It can be a cause of action for instituting a money suit,” the court observed. It added that what can be a cause of action for maintaining a money suit may not be a cause of action for initiating insolvency proceedings.

The court held that the trial Judge ought to have first examined whether the mandatory conditions under Section 9 had been fulfilled. It found that those conditions were absent and, on that ground, set aside the impugned order and allowed the appeal.

The counsel for the contesting respondents suggested that the order should be set aside only in respect of Jahir Ussain. The bench rejected this approach, holding that once the petition itself was incompetent, it could not survive selectively against respondents 10 to 14.

During the proceedings, Jahir Ussain admitted that he had borrowed ₹15 lakh from the petitioning creditors. U.A. Rahman Batcha claimed that the amount received was multiple times higher. The court declined to decide that factual dispute and left the petitioning creditors free to pursue any remedy available in law.

For Petitioner: Advocates Janaki Devi, V Shyllappakalyan

For Respondents: Advocate S.Venkatesan