Institute of Legal and Management Studies

The Supreme Court clarified the effect of annulment of insolvency proceedings on transactions carried out during the insolvency period.

The case arose from a long-standing dispute over the shareholding in a partnership firm, M/s Gavisiddheshwara & Co., originally formed in 1963. After the death of one of the partners in 1975, his son (the appellant) and widow were declared insolvent due to large debts left behind. During the insolvency, the District Court directed the court-appointed Receiver to transfer the deceased partner's 1-anna share in the firm to another partner, Mr. Allam Karibasappa, based on documents said to record an offer and acceptance of sale. A registered transfer deed was executed in 1983 in pursuance of that order.

Subsequently, the insolvency adjudication was annulled after the debtor repaid the creditors. This raised the question of whether the transfer deed executed during insolvency remained valid. The District Court, after examining the evidence, found that the documents said to record the sale were fabricated and that the transfer lacked a valid foundation. However, the High Court reversed this finding, holding that the transfer deed stood protected under Section 37 of the Provincial Insolvency Act, which saves all sales and dispositions “duly made” during insolvency, even if the insolvency is later annulled.

Section 37 of the Act states that completed, final, lawful transactions done by the insolvency Receiver should remain valid even if the insolvency is later annulled.

The Supreme Court, allowing the appeal, set aside the High Court's decision. It held that the High Court had erred in assuming that the 1983 transfer deed was final and beyond challenge. Section 37, the Court explained, protects only those transactions which are validly and conclusively carried out during insolvency. A transfer that is based on fabricated documents or on an order which is later annulled cannot be treated as “duly made” and therefore cannot be shielded under the saving clause. Since the High Court itself had earlier set aside the order that permitted the transfer, the very foundation of the 1983 deed was knocked down. The Court also faulted the High Court for overturning the trial court's factual findings without properly re-examining the evidence, stressing that appellate courts cannot lightly disturb reasoned conclusions of trial courts, especially on matters involving credibility of documents.

A bench of Justices PS Narasimha and AS Chandurkar held that Section 37's protection is conditional and applies only if the underlying order is valid. Since the foundation for the sale deed was annulled as it was set aside by the District Court, the transfer lost legal sanctity and could not be treated as “duly made.”

"As 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. It is therefore necessary to examine the due conclusion of sales and dispositions, as well as the orders of the court or the receiver.”

“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 said.

The Court upheld the District Court's finding that the alleged agreement supporting the sale was fabricated, citing contradictions in documents, missing originals, and inconsistencies with a contemporaneous power of attorney.

Accordingly, the Court allowed the appeal, restoring the District Court's order, and reinstated the appellant's partnership rights.

Cause Title: SINGAMASETTY BHAGAVATH GUPTHA & ANR. VERSUS ALLAM KARIBASAPPA (D) BY LRS./ALLAM DODDABASAPPA (D) BY LRS. & ORS.

Citation : 2025 LiveLaw (SC) 959

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Appearance:

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