Proof of debt in insolvency prevails over negotiable instrument presumption when creditors are scheduled under insolvency law.

In insolvency proceedings for settlement of a schedule of creditors under section 33 of the Provincial Insolvency Act, 1920, the court must decide whether the alleged debt is actually proved and may go behind the form of the transaction to test whether a real liability exists. The presumption of consideration under section 118 of the Negotiable Instruments Act, 1881 is a special evidentiary rule between parties to the instrument or persons claiming under them, and it does not govern proof of debt in insolvency. The creditor therefore bears the burden of proving the debt, although the court may draw an appropriate presumption under section 114 of the Indian Evidence Act, 1872 where the facts justify it.

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Issues: Whether, in proceedings for settlement of a schedule of creditors under the Provincial Insolvency Act, 1920, the presumption of consideration under section 118 of the Negotiable Instruments Act, 1881 applies so as to require the official receiver or the insolvent to displace it, or whether the creditor must prove the reality and quantum of the debt independently.

Analysis: Section 33 of the Provincial Insolvency Act, 1920 requires the insolvency court to determine whether the alleged debt is proved and to frame the schedule of creditors accordingly. The proceeding is not merely between the insolvent and the proving creditor, but also concerns the rights of other creditors represented by the receiver. In such a proceeding the court may go behind outward forms of transaction to ascertain whether a real debt exists. The statutory presumption in section 118 of the Negotiable Instruments Act, 1881 is a special rule of evidence operating between parties to the instrument or persons claiming under them, and it does not control proof of debt in insolvency proceedings. In that context, the creditor bears the burden of proving the debt, though the court may draw an appropriate presumption under section 114 of the Indian Evidence Act, 1872 if the circumstances justify it.

Conclusion: The presumption under section 118 of the Negotiable Instruments Act, 1881 does not bind the insolvency court in proceedings under section 33 of the Provincial Insolvency Act, 1920, and the creditor must prove the debt for inclusion in the schedule.

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