Appeal success annuls mortgage bond judgments. Transaction valid under Section 35 exception. Appellant awarded costs from estate.

The appeal was allowed, annulling the usufructuary mortgage bond judgments. The transaction was deemed valid, falling within the third exception to Section 35 of the Insolvency Regulation, not void against the receiver. The appellant was granted costs, to be covered by the estate in the hands of the Official Receiver.

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Issues Involved:
1. Whether the transaction in question falls within the third exception to Section 35 of the Travancore Insolvency Regulation.
2. Whether the burden of proof was correctly placed on the transferee.
3. Whether the transaction was made in good faith and for valuable consideration.
4. Whether the findings of res judicata apply to the case.
5. Whether the joint trial of the issues related to the mortgage bond and the hypothecation bond prejudiced the appellant's case.
6. Whether the transaction falls within the mischief of Section 35 of the Insolvency Regulation.

Detailed Analysis:

Issue 1: Whether the transaction in question falls within the third exception to Section 35 of the Travancore Insolvency Regulation.
The main question for determination was whether the usufructuary mortgage executed by the insolvents was within the third exception to Section 35 of the Travancore Insolvency Regulation, which exempts transfers made in good faith and for valuable consideration from being void against the receiver if the transferor is adjudged insolvent within two years after the date of the transfer.

Issue 2: Whether the burden of proof was correctly placed on the transferee.
The courts below erred in placing the burden of proof on the transferee to prove that the transaction was made in good faith and for valuable consideration. The Judicial Committee of the Privy Council in cases such as *Official Assignee v. Khoo Saw Cheow* and *Official Receiver v. P.L.K.M.R.M. Chettyar Firm* laid down that the onus is on the Official Assignee to prove that a conveyance is not made in good faith and for valuable consideration. Thus, the burden of proof lies on the Official Receiver.

Issue 3: Whether the transaction was made in good faith and for valuable consideration.
The High Court found that the entire consideration of Rs. 75,000 had been paid to the mortgagors, differing from the District Judge's finding that only Rs. 20,000 had been paid. The evidence included oral testimonies, contemporaneous entries in books of account, and admissions by the mortgagors. The High Court concluded that the transaction was fully supported by consideration. The test of "good faith" should be based on honesty rather than due care and attention, as per the Indian General Clauses Act, which defines good faith as an act done honestly, whether negligently or not. The mortgagee's actions, including deputing his sons to make inquiries about the borrowers' financial status, demonstrated due diligence and honesty.

Issue 4: Whether the findings of res judicata apply to the case.
The argument that the matter was res judicata based on the decision in *Mahomed Siddique Yousuf v. Official Assignee of Calcutta* was dismissed. The findings in the order of adjudication were not conclusive regarding the bona fides of the transferee or the consideration for the mortgage. The question of bona fides and valuable consideration was still open and had to be determined in the annulment proceedings.

Issue 5: Whether the joint trial of the issues related to the mortgage bond and the hypothecation bond prejudiced the appellant's case.
The appellant argued that his case was prejudiced by the joint trial of the issues related to the mortgage bond and the hypothecation bond. However, in view of the findings on the main issues, it was not necessary to pronounce upon this additional ground.

Issue 6: Whether the transaction falls within the mischief of Section 35 of the Insolvency Regulation.
The transaction was found to be in good faith and for valuable consideration, thus falling within the third exception to Section 35 of the Insolvency Regulation. Consequently, the transaction was not void against the receiver.

Conclusion:
The appeal was allowed, and the judgments and orders of the courts below annulling the usufructuary mortgage bond were set aside. The transaction was held binding on the estate of the insolvents, and the appellant was entitled to costs throughout, to come out of the estate in the hands of the Official Receiver.

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