The Supreme Court recently clarified the scope of protection under Section 37 of the Provincial Insolvency Act, holding that only sales or dispositions made during the course of insolvency which are valid and final can stand protected even after subsequent annulment of the insolvency. The judgment arises out of a long-standing dispute over a shareholding interest in a partnership firm, originally formed in 1963. After one of the partners died in 1975, his son (the appellant) and widow were declared insolvent to satisfy large debts left behind. During the insolvency proceedings, the District Court directed that the deceased partner’s 1-anna share in the firm be transferred to another partner, Mr. Allam Karibasappa, based on what was claimed to be a valid sale agreement. Pursuant to that direction, a registered deed of transfer was executed in 1983.
Later, the insolvency adjudication was annulled after the debtor repaid creditors, triggering the question of whether the sale made during insolvency could still be retained under Section 37. The High Court had previously held in favor of the transfer, interpreting Section 37 as protecting such dispositions. But on appeal, the Supreme Court disagreed. It allowed the appeal and set aside the High Court’s judgment, holding that the High Court erred in treating the 1983 transfer deed as final and beyond challenge simply because it was made during insolvency.
The Court explained that the protection under Section 37 is available only to those transactions that were “duly made”—i.e. valid, certain, and lawful—during the insolvency process. If a transfer is based on fabricated documents, or on a direction or foundation that is later found to be invalid, it cannot be shielded by the saving clause in Section 37 after the annulment of insolvency. In effect, Section 37 does not insulate every sale done during insolvency from being challenged; only those that are valid in substance and compliance with law should be safeguarded.
In the case before it, the Court found that the documents underlying the transfer were fabricated and the transfer lacked legitimate basis. Therefore, it could not be considered a “duly made” transaction deserving protection under Section 37. The Supreme Court thus corrected the High Court’s overbroad reading and reaffirmed that Section 37’s protection cannot extend to transactions that are tainted by invalidity, even if carried out during insolvency.
This decision tightens the limits of the saving provision in insolvency law: protection is not a blanket immunity for all acts during insolvency but is confined to validly executed, lawful dispositions.
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