Insolvency Petition | Transferees Of Debtor Cannot Substitute Debtor To Rebut Allegation Of Intent To Defeat Creditors Under Section 6(b) Provincial Insolvency Act: High Court

"The transferees cannot substitute themselves for the debtor and raise a plea on his behalf regarding his capacity to discharge the debt." Andhra Pradesh High Court, in a significant ruling, held that third-party transferees of a debtor lack the locus standi to contest allegations of insolvency on behalf of the debtor, particularly when the debtor remains ex parte.

A bench led by Justice Balaji Medamalli observed that the question of whether a debtor committed an act of insolvency by transferring property with intent to "defeat or delay" creditors under Section 6(b) of the Provincial Insolvency Act, 1920, is a personal defense that must be addressed by the debtor himself.

The appellants/petitioners were creditors who held civil court decrees against the 1st respondent. The petitioners filed an Insolvency Petition alleging that the 1st respondent had transferred the bulk of his property to his relatives (respondent Nos. 2 to 4) under nominal sale deeds to evade debt repayment. While the 1st respondent remained ex parte, the transferee respondents contested the petition, arguing that the transfer was bona fide and that the debtor possessed sufficient remaining assets to satisfy the creditors.

The core questions before the court were whether a single creditor can maintain a petition under Section 9 of the Provincial Insolvency Act and whether third-party transferees can step into the shoes of a debtor to rebut the allegation of an "act of insolvency" under Section 6(b). The court also examined whether the trial court correctly dismissed the petition despite the debtor’s failure to enter the witness box.

Single Creditor Maintainability

The High Court reiterated that the issue of whether a single creditor can maintain an insolvency petition is no longer res integra. Relying on settled precedents, the court affirmed that under the Provincial Insolvency Act, a single creditor is fully entitled to seek the adjudication of a debtor as an insolvent.

Role of Transferees in Insolvency Proceedings

The court emphasized that the determination of an "act of insolvency" under Section 6(b) is primarily a matter between the creditor and the debtor. The court noted that transferees are only entitled to contest proceedings regarding the validity of the sale under Sections 53 and 54 of the Act, typically after the adjudication of insolvency has occurred.

Court Explains Limited Scope of Transferees

The bench stated that third-party purchasers cannot substitute themselves for the debtor to assert that the debtor has sufficient means to discharge his debts. By remaining ex parte, the debtor leaves the creditors' pleadings unrebutted, and the transferees cannot compensate for the debtor's silence regarding his own intent to defeat or delay creditors.

"Respondent Nos. 2 to 4, being transferees, cannot shoulder the responsibility of respondent No. 1 to disprove the allegations/averments in the petition and to rebut the evidence of the petitioners."

Evidence of Fraudulent Intention

The court scrutinized the sale deeds, noting they contained identical recitals claiming payments were made on different occasions without providing tangible evidence of such transactions. The lack of prior acquaintance between the debtor and some transferees further corroborated the petitioners' claim that the transfers were nominal.

Establishing Intent to Defeat Creditors

 The court held that while direct evidence of a debtor's "intent to defeat or delay" creditors is rarely available, such intent can be gathered from surrounding circumstances. Since the petitioners established a prima facie case of nominal transfers and the debtor failed to testify, the statutory burden was not met by the transferees.

"The intention of the 1st respondent can be gathered from the evidence that it was only done for the purpose to defeat or delay the dues to the creditors."

The High Court set aside the trial court's order and allowed the appeal, adjudging the 1st respondent an insolvent. The trial court was directed to proceed with the appointment of an official receiver and take consequential steps under the Act. This judgment clarifies that the defense of solvency is personal to the debtor, effectively closing the door for transferees to act as proxies in insolvency adjudication.

Date of Decision: 19 August 2026