Re: Jaffer Meghji Ahamed and Another Trading as J. Meghji Ahamed and Co, Debtors (Bankruptcy Cause No. 24 of 1938) [1938] EACA 175 (1 January 1938)

BANKRUPTCY JURISDICTION

Before THACKER, J.

Re JAFFER MEGHJI AHAMED AND GULAMHUSSEIN MEGHJI AHAMED, TRADING AS J. MEGHJI AHAMED & CO., Debtors

Ex parte the CREDITORS COLONIAL GENERAL STORES, LTD. Bankruptcy Cause No. 24 of 1938

IN THE MATTER OF AN APPLICATION FOR APPROVAL OF A SCHEME OF COMPOSITION SUBMITTED BY THE DEBTORS.

Bankruptcy—Scheme of Composition—Approval of Court—Wishes of Creditors-Official Receiver's Report-Interests of minority of creditors—Creditor relatives—Bankruptcy Ordinance—Improper conduct—Failure to keep proper books of account—Failure to account.

Held (2-6-39)—In determining whether to approve a scheme of composition<br>of the affairs of a debtor which has been accepted by his creditors under the provisions of section 18 of the Bankruptcy Ordinance the Court must form its own judgment whether the terms of the scheme are reasonable or<br>calculated to benefit the general body of creditors and must not be influenced by the wishes of the majority of the creditors.

The fact that the scheme was carried largely because of the help of and the approval of creditors who were the debtors' relations against the wishes of the minority creditors who were presumably trade creditors is in itself a ground which made it undesirable to approve the scheme.

The Official Receiver reported as follows:—

1. AN INTERIM RECEIVING ORDER was made herein on the 15th day of September, 1938, on a creditor's petition.

2. THE RECEIVING ORDER was made on the 4th day of October, 1938, on the said petition.

3. THE FIRST MEETING OF CREDITORS was held on the 7th day of February, 1939, when the debtor submitted a proposal for a Scheme of Composition in the following terms:-

Proposal for a Composition

We, Jafferali Meghji and Gulamhussein Meghji, trading as "J. Meghji Ahamed and Company" the above-named debtors, hereby submit the following proposal for a composition in satisfaction of our debts:-

(1) That payment in priority to all other of our debts in all debts directed to be paid in the distribution of the property of a bankrupt shall be provided for as follows-

Such debts shall be paid in full including all proper costs charges and expenses of and incidental to the proceedings and all fees from the money lying with the Official Receiver and other money which may be realized by sale of our goods.

(2) That the following composition shall be paid as hereinafter mentioned on all proveable debts-

A composition of Sh: 5 in a $\pounds$ by monthly payments of Sh. 300 to the Official Receiver in full satisfaction of such debts commencing one month after the approval of the composition by the Court, for distribution of same, rateably among the creditors.

(3) That if this proposal is accepted by our creditors and by the Court therafter the assets (all the book debts) should be vested in us forthwith.

(4) Payments of the said monthly instalments are being guaranteed by Suleman Ahamed & Son, Merchant, Bazaar, Nairobi.

(5) That the Official Receiver be the Trustee under the composition.

(6) That the secured creditors shall retain their securities subject to any arrangements that can be made with them. by us privately.

Nairobi, this 28th day of November, 1938.

Signature of Guarantors: —

p.p. Suleman Ahamed & Son.

Signed Suleman Ahamed.

Signature of Debtors: —

Signed J. Meghji.

Signed G. Meghji.

4. The proposal was carried by the statutory majority of creditors thus: $-$

At the date of the meeting proofs of thirty-nine creditors of £2,513/4/28 had been tendered and admitted for voting purposes.

Of this number of creditors, thirty with proofs amounting to £2,202/0/70 voted for the proposal, that being a majority in number and three-fourths in value. At the meeting, however, the chairman explained that the various proofs had not yet then been investigated and if it transpired at a later date that any of the claims were fictitious action would be taken.

5. THE PUBLIC EXAMINATION was concluded on the 17th day of March, 1939.

6. At the date of the report provision has been made for the payment of all proper costs, charges and expenses of an incidental to the proceedings and all fees and percentages payable to the Official Receiver and the Court under the scale of fees and percentages in force for the time being, as required by Bankruptcy Rule 167, before the proposal can be approved by the Court.

7. The following is a summary of the debtors' Statement of Affairs under the proceedings: $-$

| | LIABILITIES | | | Assets | | | |------------------------------------------------------------------|------------------------|---------------------|-------------------------------|--------------------------------------------------------------|---------------------------------|--------------------------| | Unsecured creditors | | $\overline{a}$ | s. cts.<br>£<br>2.246<br>4 49 | Cash in hand<br>$\cdot$<br>Stock in trade attached<br>$\sim$ | £<br>$\cdot 400$ | s. cts.<br>11 06<br>0 00 | | fully<br>Creditors | | $£$ $\cdot$ s. cts. | | Book debts, good<br>$\sim$ $\sim$ $\sim$ | $340$ | 0 53 | | secured<br>$\sim$ $\sim$<br>Estimated value<br>of securities | 432 5 50 | | | £<br>$8.$ cts.<br>Doubtful<br>156<br>$0\ \ 95$ | | | | | 447 18 00 | | | $\sim$<br>Bad<br>1,168 16 84<br>$\sim$ $\sim$<br>$\sim$ | | | | Surplus | | 15 12 50 | | 1.324 17 79 | | | | Creditors partly<br>secured<br>estimated<br>Less | 100 9 78 | | | Estimated to produce<br>Surplus from securities<br>$\cdot$ | | 25 0 00<br>$15$ 12 50 | | value of securi-<br>$\quad \textbf{ties} \quad \ldots$<br>$\sim$ | | 77 10 00 | 22 19 78 | Less preferential creditors | 781 | 4 09<br>255 16 27 | | On accommodation bills as<br>drawer, acceptor or endorser | | s. cts. | 510 16 46 | DEFICIENCY | | 525 7 82<br>2.254 12 91 | | Contingent<br>OF<br>other liabilities 1,000 | | $0.00$ | | | | | | Creditors for rent<br>Creditors for rates. | | 44 5 00 | | | | | | taxes, wages,<br>etc. $\ldots$ $\ldots$ | 211 11 27 | | | | | | | Deduct contra | 255 16 27<br>255 16 27 | | | | | | | | | | £l 2.780<br>$0.73$ | | $\mathfrak{L} \mathbf{[2.780]}$ | 0 73 |

8. At the Public Examination of the debtors, several of their relatives' claims appeared doubtful in that the debtors could not show adequacy of consideration therefor.

9. The debtors appear also to have committed offences against Part VIII of the Ordinance.

10. In the Official Receiver's opinion, the debtor's Scheme of Composition has been carried through with the assistance of the large claims of their relatives, against the wishes of the minority. A sum of over £150 has already been collected, and further stock-intrade and book debts have yet to be realized. The debtors are two young men, who should contribute portions of their future earnings so as to pay their creditors at least Sh. 10 in the £.

Nairobi, 2nd May, 1939.

Signed W. B. CUMMING,

Official Receiver

Trivedi for the debtors. Official Receiver.

JUDGMENT.—This is an application to approve a scheme of composition and I have before me the Official Receiver's report upon the proposal and the debtors' Statement of Affairs. That report is prima facie evidence of what is stated therein.

The matter of approval or disapproval is one for the Court's discretion. The Court is in no case bound to approve of the scheme. It cannot approve (1) if in its opinion the terms proposed are not reasonable or (2) not calculated to benefit the general body of creditors. In exercising its discretion the Court considers both the

interests of the creditors and the conduct of the debtor. If the composition or scheme is manifestly the best thing for the creditors the Court will be inclined to approve it, but even if it is so, and the creditors have all accepted it, the Court may in the interests of commercial and public morality refuse its approval if the facts proved against the debtor are of a serious nature. Where Sh. 5 in the £ is secured the Court will not refuse for slight misconduct on the part of the debtor. All these are principles of practice well settled in these Courts.

What are the facts in this case? The Official Receiver's report states that the debtors' Scheme of Composition has been carried through with the assistance of the majority claims of the debtors' relations against the wishes of the minority; that the debtors are two young men both under thirty; and the Official Receiver is of opinion that they should contribute portions of their future earnings so as to pay their creditors at least Sh. 10 in the £. Furthermore at the Public Examination of the debtors several of the debtors' relations' claims appeared doubtful in that the debtors could not show adequacy of the consideration therefor. The Official Receiver states that the debtors have committed offences against Part VIII of the Bankruptcy Ordinance. I am told further that a sum of Sh. $38.237/74$ is unaccounted for; that the debtors have failed to keep proper books of account, and that certain property of the debtors has been transferred to the wife of one of them. The amount of the debtors' liabilities is £2,780, a sum hardly to be described as modest for these two young men. The Official Receiver states that the amount of the claims of the relations amounts to $£1,014$ , and that it was by means of these claims that the scheme for a composition was carried against the wishes of the minority. The debtors also gave credit in the sum of Sh. 2,800 according to their books towards their father's salary and this entry was made eight months before the Receiving Order.

It is upon all these facts that I am asked to approve this scheme. I should have thought upon these facts it would be obvious that the Court could not approve the present scheme of composition. The fact alone that the scheme was carried with the help of and the approval of the relations, in my judgment, makes it undesirable to approve this scheme. The minority who were outvoted are presumably trade creditors and not relations. Then again there are the offences against the Bankruptcy Ordinance which these debtors are alleged to have committed. The large sum of Sh. 38,274 has not been accounted for by the debtors. This is an offence against section 137 (1) (c) of the Bankruptcy Ordinance. More important still the debtors have failed to keep proper books of account. This is an offence against section 138. It perhaps is not sufficiently appreciated that it is an offence under the provisions of the Bankruptcy Ordinance for persons engaged in trade not to keep a proper and truthful set. of books of all their commercial transactions. Lastly there is the alleged offence of transferring property to a wife. I should, I think, be encouraging the lowering of the standard of commercial morality were I to approve of this scheme with these alleged offences on the record before mc. These offences cannot in my opinion be described as acts of slight misconduct—they are not slight, they are serious.

A distinguished Judge, Lord Esher, M. R., has given his opinion of the large majority of creditors in a case which he had to adjudicate on in 1886, the case of Ex parte Reed and Bowen. In re Reed and Bowen, 17 Q. B. D.

244. I give the following extracts from Lord Esher's judgment: $-$

"A great deal has been said about the opinion of a large majority of creditors, and the case has been argued much as it might have been if the Bankruptcy Act of 1883 had never been. passed.

In my opinion this Act was passed because it had been proved to the satisfaction of the legislature that a majority of creditors, however large, was not careful, and was not to be trusted: that on the contrary, the creditors were generally utterly careless, that they wrote off their debts as bad, and agreed to terms which might give some possibility—an evanescent chance of their getting something out of the wreck. It was because of the known and proved behaviour of creditors with regard to their insolvent debtors that this Act was passed, taking away from the majority of creditors that power which they had so recklessly and carelessly used, and putting a controlling power into the hands of the Court for the purpose of protecting the creditors against their own recklessness for the purpose of preventing a majority of creditors from dealing thus recklessly, not only with their own property, but with that of the minority, und of enforcing, so far as the legislature could, a more careful and moral conduct on the part of debtors.

This being the object of the legislature, let us see what means they have taken to carry it into effect. They have appointed an official receiver, and have directed him to make a report to the Court as to the terms of any proposed composition or scheme, and as to the conduct of the debtor, and any objections made by any creditor, which report is to be prima facie. evidence of the statements contained in it. That is giving him immense powers, and for what purpose? In order that the Court might not be forced, as it had formerly been, to rely upon the view of the majority of the creditors; in other words, to protect the Court from the very argument which has been so much insisted upon to-day."

I see no reason for thinking that notwithstanding the present control of the Court, creditors may still not be reckless and careless not only with their own property but that of the minority. And in that case be it remembered Lord Esher was not talking of relations in particular but of creditors in general. And then the Master of the Rolls has something to say as to what the Court should keep in mind in exercising its jurisdiction and discretion: —

"Further, in order to carry out this view of the legislature as against this reckless conduct of creditors, they have imposed on the Court the duty of approving the composition or scheme, to which the creditors or the great majority of them have agreed. It is not to be sufficient that the creditors are satisfied with the scheme; notwithstanding the agreement of the majority of the creditors the Court must also approve of the scheme.

How is the Court to exercise this jurisdiction? If the Court is of opinion that the terms of the scheme are not reasonable. or are not calculated to benefit (not the creditors who have agreed to them, but) the general body of creditors, then 'the Court shall refuse to approve the scheme,' although it has been agreed to by the creditors. And. although the scheme has been agreed to by the creditors, and although the terms of it might be reasonable, so far as the creditors are concerned, and calculated to benefit the general body of creditors, yet, for the guarding of the morality of trade, if the case be one in which the Court would be required, if the debtor had been adjudged bankrupt, to refuse his discharge, 'the Court shall refuse to approve the scheme."

And, still further, not for the benefit of the creditors after the insolvency, but in order to protect the morality of trade, if any such facts are proved, as would, under the Act, justify the Court in refusing, qualifying or suspending the debtor's discharge. if he had been adjudged bankrupt, the Court may, in its discretion, not impose new terms, but refuse to approve the scheme."

I for my part may perhaps usefully add this warning. The principle which guides and should be always before those whose duty it is to administer Bankruptcy Law is, as I see it, that its provisions exist for the assistance of those persons who in spite of honest trading for some genuine reason or another are bona fide unable to meet their liabilities not for those who pursue extravagance or recklessness in trading and then when the inevitable insolvency results wish to fall back comfortably on the Ordinance as an easy and ready means of avoiding the liabilities they have incurred.

I see no grounds here for approving this scheme other than the fact that a majority of creditors have approved it, but as this majority consists 'of relations, some of whose claims are doubtful, such approval does not in the least impress me. I cannot discern even. one reason why I should give the Court's approval. On the other hand I see more than one sufficient ground for refusing to approve this scheme of composition, and it accordingly will not receive my approval.