Sockalingam Chettiar v. Ramanayake.
1933Present: Dalton A.C.J. and Koch A J.
SOCKALINGAM CHETTIAR et al. v. RAMANAYAKE et at.
59 (Inty.)—D. C. Colombo, 43,649.
Promissory note—Mortgage bond to secure future advances of money—Moneylent on promissory notes—Notes fictitious and unenforceable—Bondunenforceable—Money Lending Ordinance, No. 2 of 1918, ss. 10, 13,and 14.
Plaintiffs sued on a mortgage bond, which was entered into by thedefendant to secure loans given to him by the plaintiffs from time totime on promissory notes, which did not comply with the requirementsof section 10 of the Money Lending Ordinance.
Held, that the bond was unenforceable to the extent of the money lenton the promissory notes.
HE plaintiffs brought this action on a mortgage bond No. 515 ofJuly 28, 1928, to recover from the first defendant the sum of
Rs. 129,415.87 alleged to be due to them on money lent on promissorynotes and an I. O. U. The second plaintiff is an assignee of one of theoriginal lenders. The second and third defendants were joined as puisneencumbrancers. The bond sets out that the first defendant had appliedfor loans from plaintiffs and that they agreed to make such loans up tosuch amount as they thought fit, upon his entering into the bond andgiving the security. The plaint set out that, in pursuance of the agree-ment in the bond, the first plaintiff lent and advanced to the first defendantvarious sums of money, which were still owing and due to him on sixteenpromissory notes. The second plaintiff lent similar stuns of money oneight promissory notes and an I. O. U. The first defendant pleaded thatonly a sum of Rs. 11,600 was due to the plaintiffs and alternatively thatas the notes did not comply with the provisions of the Money LendingOrdinance, the plaintiffs were not entitled to claim any sum. The learnedDistrict Judge held that in an action to recover any money due on thebond, the plaintiffs are entitled to use the notes as evidence of the loansmade by them to the first defendant and gave judgment for the plaintiffs.
Hayley, K.C. (with him Rajapakse, Yogaratnam, and Wijeratne), for firstand second defendants, appellants.—Where a penalty is attached to themaking of a contract, if the contract is contrary to public policy it isillegal (1910 A. C. 514). Apart from the question of security on the bond,plaintiff can sue on a verbal promise as well as a written one. So that amoney lender who incurs a penalty under the Ordinance can always tearup the note and sue on a verbal statement that the money is due. If thenotes are illegal he cannot sue on the notes. He cannot also sue on thetransaction on which the note was given. The whole transaction is oneact and any illegal act in it makes the whole transaction void. SeeEnglish Money Lenders’ Ordinance; Sterling v. Johnson *; Mertsz v. TheSouth Wales Equitable Money Society=; Victorian Dzylesford Sy .aicatc.Ltd. v. Dott‘; Cannon v. Bryse There is ' reported case in w-
1 (1923) 1 K. B. 557.■ v-itf"., 3 CK. 624.
– (1927) 2 K. B. 3(16.■ c ' *-Dnll and Aldvr$n 179.,
Sockalingam Chettiar v. Ramanayake.
a plaintiff suing in this way has been allowed to sue alternatelyon the money count. Where a note is invalid under the Bills of Ex-change Act. e.g., if it has been altered, there is some authority thatplaintiff can sue on the money count. But where the note is illegal andinvalid he cannot (Ashling v. Boon The note cannot even be used asevidence.
H. V. Perero, for plaintiff, respondent.—Even if the notes are unenforce-able that would affect only the action on the notes. This is an action onthe bond on money lent. Unless section 10 avoids the note altogether,the debt on the note will still exist. Section 10 only makes the noteunenforceable. The action on the bond must be distinguished from ajoinder of a number of causes of action on the various sums lent.
[Dalton A.C.J.—Is not this another method of enforcing the notes?]
This is not an action to enforce the various contracts of loan but theone promise to pay on the bond. There is a valid promise to pay and alegal obligation. It is not a case of money illegally due as, for instance,on a betting transaction. There are English cases on the Sale of GoodsAct where similarly certain contracts are made unenforceable (Maddisonv. Alderson *; Taylor v. The Great Eastern Railway *). Although a contractmay be unenforceable all the legal incidents of a contract may exist(Morris v. Baron & Co. *). A contract in writing complying with all theterms of section 4 of the Sale of Goods Act can be rescinded by a laterparol contract although the latter may be unenforceable by reason ofnon-compliance with the terms of the statute. There is a great differencebetween enactments which say that a contract is unenforceable and thosethat say that a contract is void. A contract may be made unenforceableby law for several purposes, e.g., under the Registration of Business NamesOrdinance (22 N. L. R. 168). An act might be penalized but not pro-hibited (Smith v. Mawhood8). This is particularly so in the case ofcontracts collateral to a promissory note. The adequacy of the considera-tion does not enter into the validity of the obligation. If a penalty isattached to the contract itself then it may be presumed that the contractitself is void.
In Kadiresan Chetty v. Arnolis6. Bertram C.J. gives the reasons under-lying section 10 of the Money Lending Ordinance. The object of theOrdinance is to make the borrower pay only the sum and the interest onthe sum actually borrowed.
The obligation on the mortgage bond is distinct from the variousobligations arising from the several promissory notes. Even if the notesare void that makes no substantial difference. It may make a differenceto the burden of proof. Even if the notes are void one must recognizethe obligation on the money advanced, provided such advance can be
proved (4 C. W. R. 193; Sutton v. ToomerT).
Hayley, K.C., in reply.
(1891) 1 Gh. 568.
2 (1883) 8 A. C. at 474..
(1901) 1 K. B. 744.
" 7 Barn, and Cress. 416. .
* (1918) A. C. 1.
5 14 M. and W. 45H.•38 N. L. R. 162.
DALTON A.CJ.—Sockalingam Chettiar v. Ramanayake,
August 1, 1933. Dalton A.C.J.—
These two appeals by the defendants have been taken together. Theinterlocutory appeal is from an order of December 19, "932, directingthe plaintiffs to file a statement of accounts on certain Junes, and thesecond appeal from a final order of December 21, entente judgment forthe plaintiffs, for the sum of Rs. 111,518.78, interest, and ^ 4ts.
The plaintiffs, who are money lenders, brought this action on April 1,1931, on a mortgage bond No. 515 of July 28, 1928, to recover from thefirst defendant the sum of Rs. 129,415.87 alleged to be due to them formoney lent, on promissory notes and one I. O. U. Of this sumRs. 129,198.50 is alleged to be principal and interest due on promissorynotes, Rs. 201.87 principal and interest due on an L O. U., and Rs. 15.50due for noting fees. The second plaintiff is the assignee of one of theoriginal lenders under an assignment dated the day the action wasinstituted. The second and third defendants were joined as puisneencumbrancers. The first defendant in his answer pleaded that only thesum of Rs. 11,600 was due to the plaintiffs at the end of 1930, withinterest thereon, and alternatively that the notes did not comply with theprovisions of the Money Lending Ordinance and that plaintiffs were notentitled to claim any sum.
It was further pleaded by the defendant that there was mis-joinder ofplaintiffs and causes of action, which plea was upheld by the learned trialJudge when the matter came up originally for trial. The plaintiffsappealed from that decision and their appeal was allowed by this Courton January 25, 1932 (reported at 33 N. L. R. 319), the Court of Appealholding, that the action being on the bond, the obligees were entitled tosue in one action to recover the aggregate amount due to them. Thecase thereupon went back to the District Court for trial, and was decidedon December 21, 1932, whence these two appeals now are taken.
The action is brought on the bond, which is dated July 28, 1928. Upto that date there had been no transactions between the first defendanton the one side and the first plaintiff and the second plaintiff’s assignor.The bond sets out that first defendant had applied for loans and thatthey agreed to make such loans up to such amount as they thought fitupon his entering into the bond and giving the security mentioned therein.He bound himself thereby to pay to the obligees all such sums of moneyas they might from time to time advance to him in respect of any prom-issory notes or cheques made or endorsed by him, or upon chits, tundus,or other writings made by him and given by him to them. He furtherbound himself not to take any plea or objection whatever against thesaid promissory notes, cheques, or other writings, or against the accountsof the obligees.
The plaint sets out that in pursuance of the agreement in the bond thefirst plaintiff lent and advanced to the first defendant various sums ofmoney, which were still due and owing to him, at different dates onsixteen promissory notes which were set out in detail, all amounting tothe sum of Rs. 72,317. To the second plaintiff was said to be duethe sum of Rs. 57,083.37 said to be due on eight promissory notes andone I. O. U. of different dates. The I. O. U. for Rs. 200, although
36DALTON A.C.J.—Sockalingam Chettiar v. Ramanayake.
referred to in the plaint as being marked Y, does not appear to have beenproduced at any time as were the promissory notes, and hence it is notnecessary to say anything more about that item, since it has not beenproved, and one does not know its contents.
In order to prove the amount that was alleged to be due on the bondthe plaintiffs led evidence in respect of the various loans alleged to havebeen made, producing the promissory notes detailed in the plaint, whichwere taken in the ordinary course of the transactions between the parties.An issue has been framed as to whether these notes were enforceable byreason of a failure to give details required by section 10 of the MoneyLending Ordinance (No. 2 of 1918), and the learned trial Judge has heldthat none of them are enforceable. From that conclusion no appeal hasbeen taken. The contention of the defendants on this point does notappear to have ever been seriously contested during the trial. Thelearned Judge has held however that in the action to recover a sum ofmoney due on the bond the plaintiffs are entitled to use the notes asevidence of the loans made by them to the first defendant, the fact thatthe notes are themselves unenforceable not preventing their use asevidence to prove the amount due on the bond. The principal pointarising on this appeal is whether the learned Judge was correct in thisconclusion.
Section 10 of the Money Lending Ordinance requires certain particularsto be set out-in every promissory note given as security for the loan ofmoney. The notes in question have failed to comply with the provisionsof this section because some of them fail to show the amount of moneydeducted as interest paid in advance, and because the others that arerenewal notes fail to show the capital sum actually borrowed. Undersub-section (2) the. notes are therefore not enforceable, subject to theprovision that relief may be given if the Court is satisfied the default isdue to inadvertence.
In addition to these notes being unenforceable, section 13 of theOrdinance provides a heavy penalty for any person who takes a fictitiousor blank promissory note as security for any loan. For the first offencehe is liable to a fine not exceeding Rs. 500, and for a second or subsequentoffence either to a fine not exceeding Rs. 1,000 or to simple imprisonmentnot exceeding six months. The offence is therefore one for which aheavy punishment is provided. Section 14 sets out what is a fictitiousnote. A note which fails to comply with the provisions of section 10,in respect of money deducted as interest paid at the time of the loan,or in respect of the actual amount of the sum advanced is a fictitious note *within the meaning of section 13. Not only are these notes thereforeunenforceable under the provisions of section 10, but they are notes takenas security for a loan, the taking of which is prohibited by section 13.
Is it open to the plaintiffs, in their action on the bond to recover loanssecured by the bond, to prove those loans made by the production ofnotes, the taking of which is prohibited by law ?
The learned trial Judge, in support of his conclusion that the notes areadmissible for this purpose has relied on a dictum of Bertram C.J. inValiappa Chetty v. Silva.1 That case had reference to a promissory note
120 N. L. R. 340.
DALTON A.C.J.—Sockalingam Chettlar v. Ramanayake.
in which it was alleged, on appeal, a material alteration had been madein the rate of interest after the note had been signed. No issue had beenraised on this point in the lower Court and under the circumstances theCourt refused to let the appellant take it for the first time in appeal.Bertram C.J. in the course of his judgment states—
“if the point as to the effect of the alleged alteration had beenthen raised, there is no question that the plaintiff would have askedleave to amend his pleadings by claiming the money due apart fromthe promissory note, and there is no question on the English decisionsthat, if he had been given the opportunity, even though the note wasvoid by the alteration, he could have used the note as evidence on whatused to be called the ‘ money count
In the course of his judgment the learned Chief Justice refers to Masterv. Miller1 and the cases there cited. I will come back to these caseslater.
That the Money Lending Ordinance prohibits the taking of these notesas fictitious notes is clear. I have no doubt also that section 13 and otherprovisions of the Ordinance also are for the protection of the public. Inthis respect there is no difference between the local Ordinance and theEnglish Money Lenders’ Act, 1900 (63 & 64 Viet. c. 51). In this eventtherefore in the words of Buckley J. (Victorian Daylesjord Syndicate, Ltd.v. Dott'), the purpose of the act being a public one, the act for the doingof which a penalty is imposed is an act which is impliedly prohibited bythe statute and is consequently illegal. The established rule of law, asstated by Bowen L.J. in Mellis v. Shirley Local Board “, is and always hasbeen that no action can be maintained on a contract which is prohibitedeither by the common law br by statute. Esher M.R. sets out the' following rule of interpretation. Although a statute contains no expresswords making void a contract which it prohibits, yet when it inflicts apenalty for the breach of the prohibition, one must consider the wholeact as well as the particular enactment, and come to a decision eitherfrom the context or subject-matter whether the penalty is imposed withintent merely to deter persons from entering into the contract, or for thepurpose of revenue, or whether it is intended that the contract shall notbe entered into so as to be valid in law.
The principle is very clearly stated by Parke B. in Cope v. Rowlands *.Where the contract which the plaintiff seeks to enforce, be it express orimplied, is expressly or by implication forbidden by the common orstatute law, no Court will lend its assistance to give it effect. He addsthat it is equally clear that a contract is void if prohibited by a statute,though the statue inflicts a penalty only, because such a penalty impliesa prohibition. He continues that it may be safely laid down that if thecontract be rendered illegal it can make no difference in point of lawwhether the statute that makes it so has in view the protection of therevenue or any other object. The sole question is whether the statutemeans to prohibit the contract. This statement of the law is cited withapproval by Lord Dunedin in Whiteman v. Sadler * and Cornelius v.
1 Smith's Leading Cases, Vol. 80S.
= (1905) 3 Ch. at p. H30.
116 p. B. D. m.
* 2 A/. and IF. 149.SIC A. C. at p. 52G.
«.4. r. at p. 213.
DALTON A.C-T.—Sockalingam Chettiar v. Ramanayake.
It is not suggested of course that the contract on the bond in the casebefore us is, as a contract, in any way. illegal. What is urged for thedefendants is that if any loan transaction for which the bond purportsto give security is itself illegal, the bond in so far as it is security for thatillegal transaction is also illegal and no obligations can flow from it. Inthe last case I have cited above, Lord Finlay L.C. puts the rule of law inthe following way. He states that it is admitted on all hands and couldnot be disputed that a statutory prohibition avoids any transaction incontravention of the prohibition, as the transaction is unlawful and anytransaction which forms part of it is void and can confer no rights.Lindley L.J. refers to the same principle in Scott v. Brown, Doering,McNab & Co. He says that no Court ought to enforce an illegal contractor allow itself to be made the instrument of enforcing obligations allegedto arise out of a contract or transaction which is illegal, if the illegalityis duly brought to the notice of the Court, and Smith L.J. adds that if aplaintiff cannot maintain his cause of action without showing as part ofthat cause of action that he has been guilty of illegality, then the Courtswll not assist him in his cause of action.
Mr. Perera for the plaintiffs argued that the obligation on the bondmust be distinguished from the obligations in respect of the separateloans made from time to time. But he has to concede that to prove whatis due on the bond plaintiffs have to prove each individual transactionfor which the bond has been given as security, each transaction in respectof these notes being an illegal one. In the case of Cannan & another v.Bryce one A entered into an illegal stock jobbing transaction by whichhe sustained a heavy loss. The defendant, who was not a partner in thetransaction, lent him money to pay for that loss and in consideration ofthe money so lent A and another executed a bond in favour of the defend-ant. It was urged on behalf of the defendant that he was not a partyto the illegal transaction, the loan by him was not illegal, and the securitieswere therefore available in law. In the course of his judgment Abbott C.J.states that if the defendant acted unlawfully in lending his money hecould not have sued for recovery of payment; if recovery could not beenforced at law upon the contract of lending, neither could recovery beenforced upon a bond given for the performance of that contract, thebond being not less void than the contract.
Another case of the same nature is Fisher v. Bridges *. Defendantentered into an agreement to purchase land from plaintiff for an illegalobject and the land was conveyed to him accordingly. He then executeda deed to secure to plaintiff the payment of the purchase price. It wasnot denied that the original agreement was tainted with illegality, and noaction could be brought to recover the purchase price of the lands thesubject of the illegal agreement. In an action on the covenant to pay,however, it was urged that the covenant was good and could be enforcedat law, being under seal and no consideration being .necessary. Jervis C.J.pointed out however that on the authorities, in such a case where the bondor other instrument is connected with the illegal agreement, it cannot beenforced. It was clear that the covenant was given for payment of the
1 (1892) 2 Q. B. 724.1 2 3 Barneicall and Alderson 179.
2 3 El. and B!. 643.
DALTON A.C.J.—Sockalingam Chettiar v. Ramanayake.
purchase price, and sprang from the illegal agreement; as the law wouldnot enforce the original illegal contract, so neither would it allow theparties to enforce a security for the purchase money which by the originalbargain was tainted with illegality. The bond before us in no waysprings from any illegal agreement. It was in fact executed before theillegal transactions were entered into, although the covenant therein notto take any plea or objection to any promissory note or other documentis certainly under the circumstances suspicious. Even however if thatsuspicion be not justified, just as the law will not enforce those subsequentillegal transactions, so it seems to me will it refuse to enforce the securityfor those illegal transactions, the bond so far as it secures the illegaltransactions being tainted with the same illegality.
By way of analogy, in support of the argument that although the notesmay not be enforceable, the contract is nevertheless not void, we havebeen referred to several cases arising under the English Sale of Goods Actand the Statute of Frauds. Section 4 (1) of the Sale of Goods Act, 1893,requires some note or memorandum in writing of the contract of sale,otherwise, the contract shall not be enforceable. It is pointed out,however, by Bigham J. (Taylor v. Great Eastern Railway Co. (supra) )that theonly effect of the non-fulfilment of the statutory conditions is that thecontract is unenforceable. It is not void, and the contract being stillgood all the legal consequences of a contract follow, including the passingof the property in the goods to the buyer. The statute merely providesthat the contract shall be proved in a certain way, otherwise it shall notbe enforceable. Cases arising under sections 4 and 17 of the Statute ofFrauds are in the same position. In Lucas v. Dixon' Bowen L. J. refersto the view expressed by Lord Blackburn in Maddison v. Alderson’. Hestates there that, although this view had not been universally accepted,it was then (1889) finally settled that the true construction of bothsection 4 and 17 of the Statute of Frauds was not to render the contractsunder them void, but to render the kind of evidence required indispensablewhen it was sought to enforce the contract.
Another class of case referred is that dealing with revenue matters suchas Smith v. Mawhood (supra). That was a case arising under an ExciseLicence Act, which subjected to penalties any manufacturers of or dealer inor seller of tobacco who did not have his name painted on his premises asrequired by the Act. It was held this did not avoid a contract of sale oftobacco made by a dealer who had not complied with the terms of thelaw; Parke B. in the course of his judgment states that looking at the Acthe thought the object of the legislature was not to prohibit a contract ofsale by dealers who had not taken out a licence in accordance with the Act.The object was not to vitiate the contract itself, but only to impose apenalty on the party offending for the purpose of the revenue.
The cases relied upon by the learned trial Judge in support of his con-clusion that the notes were admissible in evidence in an action on the bond,such as Valiappa Chetty v. Silva (supra), and those referred to in the notesto Master v. Miller (supra), of which Sutton v. Toomer (supra) is one, dealwith promissory notes that have been materially altered. In the latter caseLord Tenterden held that although the plaintiff could not recover on the* 32 Q. B. D. 357.2 « App. Cases 467 at 468.
DALTON A.CJ.—Sockalingam Chettiar v. Ramanayake.
note itself he could recover on the count for money lent Although theinstrument had, as a result of the alteration, become void as a security,yet the original loan was not destroyed, nor were the terms on which theloan was made rendered void. It was therefore competent for theplaintiff to produce the instrument in evidence to prove the terms onwhich the money was deposited. Under the provisions of the lawrelating to bills of exchange in certain cases where a bill or acceptance ismaterially altered without the assent of all parties liable on the bill,it is avoided except as against a party who has made or assented to thealteration and subsequent endorsers, the alteration not however extin-guishing the debt (Byles on Bills, pp. 285, 290). These cases arehowever of no assistance in the case of transactions which are prohibitedby law.
To return to the facts of the case before us, if the notes that are penal-ized under section 13 of the Ordinance could be produced in evidence insupport of a loan on what is called the money count, the provisions of thelaw would be evaded, and the Money Lending Ordinance would be of noforce or effect. The same result would follow if the notes were allowed tobe produced in evidence to prove what sums were secured by the bond nowsued on. There would be no need at any time for any money lender toask for relief in any case under any of- the provisions of the Ordinance,and run the risk of his application being refused, since all he need do, ifthe learned Judge is correct, is to sue for a return of the money in anyordinary action for money lent, and produce the unenforceable notes asevidence of the loan.
The fact that money lending transactions in which fictitious or blankpromissory notes are taken as security for a loan may be reopened undersection 2 of the Ordinance does not, in my opinion, alter the effect ofsection 13 which prohibits and penalizes such transactions. It is possiblethat a borrower may have made payments in respect of such transactionswhich he may desire to reopen, or the lender may have parted with thesecurity to third parties. The provisions of section 10 also in so far as itprovides that notes not complying with the provisions of that section(some of which at any rate will be fictitious within the meaning of section14) shall not be enforceable, dp not alter or lessen the effect of section 13.Having held that issue 8 must be answered in the affirmative, and thatthe notes are unenforceable for the reasons given, thereby contraveningthe provisions of section 13 of the Ordinance, the learned Judge shouldhave held that plaintiffs could not rely on them in support of their claimon the bond, since they are fictitious notes and illegal.
There is some suggestion, but no definite finding, in the judgment ofthe learned trial Judge that the default of the plaintiffs was due toinadvertence which, in so far as the notes failed to comply with theprovision of section 10 of the Ordinance, might entitle them, to be givenrelief under that section. He states also, in spite of his conclusion thatthe transactions were harsh and unconscionable and unfair between theparties, he would be inclined to give the plaintiffs relief also in respect oftheir failure to keep proper books of account as required by section 8 ofthe Ordinance. On this point I can only say that in my opinion theplaintiffs have entirely failed to show that their defaults were due to
KOCH AJ.—Sockalingam Chettiar v. Ramanayake.
inadvertence,, or that they are entitled to any relief at all under thesesections. The lenders are professional money lenders. The first plaintiffstated he had been doing business as a money lender in Ceylon for thirtyyears. At one time he admitted he did not know the requirements ofthe law in regard to the filling up of notes when a loan is made, but he hadto withdraw that statement. His books admittedly do not comply withthe requirements of the law so as to state clearly the items and trans-actions incidental to the account. The defaults, so far as the transactionswith first defendant are concerned, would appear to continue through-out the time the transactions went on, and would seem to be systematic.What is the inadvertence as a result of which the defaults occurredplaintiffs do not state. I am unable to see that they are entitled to anyrelief on that ground.
For the above reasons, in my opinion, the appeal must be allowed.The plaintiffs having sought to prove the amount due to them on thebond, apart from the I. O. U. which has not been produced, by means ofpromissory notes which are illegal, their action must fail. The fact thatfirst defendant admitted a sum of Rs. 11,600 remained due to them inrespect of the illegal transactions and prayed that plaintiffs’ action inexcess of Rs. 12,000 be dismissed, does not in the circumstances entitlethem to judgment for that sum. This action must be dismissed, withcosts to the first and second defendants in both Courts.
The facts of this case have been very clearly and fully set out by MyLord the Acting Chief Justice, and it is needless therefore for me torecapitulate them.
The learned counsel for the appellants has raised a point of law which,although novel so far as practitioners and the Courts of this Island areconcerned, is nevertheless one of utmost importance with far-reachingconsequences. In brief, the position he took up was that the accumula-tive effect of sections 8, 10, and 13 of our Ordinance relating to moneylending, viz., Ordinance No. 2 of 1918, is that any money lending trans-action, which has been secured by the issue of a promissory note whichfails to strictly comply with the requirements of section 10, or by a.notewhich bears the infirmity that is set out in section 13, or if unsecured isnot recorded as a loan in the manner prescribed in section 8, will not beregarded as a transaction in a Court of law, however inconspicuous maybe the merits of the defence.
There can be very little doubt that Courts of law in this Island, havingfor a considerable time acted under decisions of English Courts such asSutton v. Tomer permitted a promissory note although rendered whollyinvalid as a security by reason of a material alteration, &c., to be givenin evidence to prove the terms on which the money secured by the notewas lent. Vide Valiappa Chetty v. Silva * Silva v. Goonewafdena Hamine %Meeyan v. Salsa Bhai Palaniappa v. SaminathanMohamadu Bhai v.Jmes *, Kadiresan Chetty v. Amolis A practice in consequence gradually
(1837) 7 Bam. and Cres. 416.* 3 Law Bee. 76.
* 20 N. L. R. 340.*17 N. L. B. 66.
’ 3 Law Bee. 171.'6 21 N. L. R. 234.
' 23 N. L. R. 162.
KOCH A.J.—Sockalingam Chettiar v. Ramanayake.
grew up of adding in the alternative a money count in an action, inwhich the primary claim was based on the promissory note sued upon.If this was not done in the first instance, very frequently the plaint wasamended by the insertion of this additional count when objection wastaken to the validity of the note. The practice became rooted and estab-lished to such a degree that the passing of the Money Lending Ordinanceof 1918 and its introduction into the Statute Book was not considered asmaking any difference in the law, and the full legal effect and implicationsof the section n'ow relied on by the appellants were never seriouslyappreciated. The argument is now strenuously pressed upon us and hasto be carefully considered.
A leading case, Cope v. Rowlands', was relied on by appellants’ counselas furnishing, so far back as in the year 1836, the guiding principle thatshould influence the validity and legal effect of contracts entered intoin connection with transactions regulated by statute. The facts brieflywere that a broker, not being licensed by the Mayor and Aldermen of theCity of London pursuant to 6 Anne, c. 16, sued for his brokerage charges.Section 4 of this Act provided that all brokers shall from time to time beadmitted by the Court of Mayor and Aldermen with a proviso whichimposed a fine on anyone who acted without being so admitted. BaronParke in this case succinctly sets out the law. He laid down as perfectlysettled law that where the contract the plaintiff seeks to enforce, be itexpress or implied, is expressly or by implication forbidden by commonor statute law, no Court will lend its assistance to give it effect, and thatthe contract is equally void if prohibited by a statute though the statuteinflicts a penalty only, because such a penalty implies a prohibition, andthat it makes no difference in point of law whether the statute whichmakes it so has in view the protection of the revenue or ony other object.The sole question is whether the statute means to prohibit the contract.
In a case which later arose under the Pawn Brokers Act, Fergusson v.Norman4 Tindal C. J. in adopting and approving the dicta of Baron Parkeadvanced an instance, illustrative of not intending even by implication toinvalidate the contract. The case he gave was one in respect of dutiesimposed on pawnbrokers which are entirely collateral to the contract,e.g., the instance in which his name is required to be put over the doorand a penalty is given for not doing so. The pawnbroker puts up hisname but spells it incorrectly, it will not follow that the contract enteredinto between the pawnbroker and the individual is therefore void.
In 1910 the House of Lords delivered a judgment of extreme importanceon the point in the case of Whiteman v. Saddler4. Lord Dunedin citedwith approval the views of Baron Parke and, in adopting the illustrationgiven by Tindal C.J. in Fergusson v. Norman (supra), added another thatmay come up under the Coal Mines Act, and observes that it could hardlyseriously be argued that if a mine owner had contravened one of thenumerous and minute requirements of the Act, he" would be disabledfrom recovering from his customers the price of coals which he had soldto them. He adopted the principle already referred to as laid down by
2 5 Bing N. C. 76, 64.
> S M. and W. 157.
(1910) Appeal Cases 514.
KOCH A.J.—Sockalingam Chettiar v. Ramanayake.
Baron Parke and Tindal C.J. and later by Buckley J. in Victorian Dayles-ford Syndicate, Ltd. v. Dott1 and by Collins, Master of the Rolls, in Bonnardv. Dott * with the distinction that though Farwell L.J. applied the principlein the case of a contract wjuch was expressly forbidden and made criminalby Act of Parliament, Lord Dunedin applied it by extending the principleto cases where the contract was impliedly forbidden. He drew attentionto the difficulty of applying the principle in cases where nothing is saidabout the contract as such, but certain duties or prohibitions are imposedon certain classes of persons, and came to the conclusion that the upshotof the matter lay in each statute being judged of by itself.
In the case above referred to of Victorian Daylesford Syndicate, Ltd. v.Dott (supra), Buckley J. was of opinion that a contract which is prohibitedexpressly or impliedly by a statute is illegal. If expressly, it is a simplematter, but when may one say that the contract is impliedly prohibited ?If the implication depends on a penalty being imposed for doing or notdoing an act, it is necessary to consider whether the penalty is imposedfor the purpose not only of protection of the revenue but also for theprotection of the public. The learned Judge was of opinion that thewhole purpose of the Money Lenders’ Act was the protection of the public.The finding in Victorian Daylesford Syndicate, Ltd. v. Dott (supra) wasapproved in Bonnard v. Dott (supra), Collins M.R. holding that the MoneyLenders’ Act of 1900 prohibited a money lender who had not registeredhimself as such from making any agreement with respect to the advanceand repayment of money and from taking any security for money as amoney lender. Any such agreement was illegal and void, and theprohibition was intended for the protection of the borrower.
I might mention that in an earlier case, Smith v. Mawhood *, Baron Parkewas of opinion that if the object of the legislature was to prohibit acontract, the contract would be vitiated although the prohibition wasmerely for the purpose of revenue. It may be noted that the distinctionbetween this case and the one previously referred to, viz., VictorianDaylesford Syndicate, Ltd. v. Dott (supra), is that in the latter case thecontract itself was prohibited for the purpose of the revenue, whereas inthe former case the penalty was imposed with this object.
Atkin L.J. in a recent case, Merxz v. South Wales Equitable Society,Ltd.*, was clearly of opinion that the object of the legislature in passingthe Money Lenders’ Act was to see that the dealings of money lendersshould be open and above ground, and Bankes L.J. and Scrutton L.J.joined with them in holding that a money lender who did not complywith the Money Lenders’ Act by taking the security in the registeredname of the money lender as provided for by section 2, sub-section (1)(c) of the Act could not sue as the security was illegal and void.
The weighty decision of the House of Lords in Whiteman v. Saddler (supra)was upheld, so far as the principle laid down was concerned, in a fairlyrecent judgment of that Board in the case of Cornelius v. Phillips’, but
(1905) 2 Chancery 624.
(1906) 1 Oh. 740.
5 (1918) A. C. 199.
a 14 M. and W. 452.
* (1927) L. B. 2 K. B. 366.
KOCH A.J.—Sockalingam Chettiar v. Rama.na.yake.
their Lordships drew this distinction, that where there was registrationof the money lender’s name but such registration was an improper one,they did not agree with Lord Dunedin that it was no registration at all,and therefore were of opinion that the plaintiff had a registered name,and as the statute sought only to prohibit, dealings in a name that wasnot registered at all, the money lender could sue.
The legal deductions from this mass of cases, in my opinion, are asfollows:—
If the contract or transaction is expressly prohibited by common
or statute law, it does not matter that the law which made it sohad in view the protection of the revenue or any other object.The contract cannot be enforced.
If the contract or transaction is forbidden by implication, e.g., by
the infliction of a penalty, whatever the object may be forentering into the contract, the contract is void and cannot beenforced.
If the penalty is imposed for doing or not doing an act which should
not be done or done at the time the contract is entered into, it isnecessary to consider whether the penalty has been imposed forthe purpose of the protection of the revenue or for the protectionof the public. If for the former purpose, the contract may beenforced ; if for the latter, the contract is unenforceable.
But if the act required to be performed is one of marked triviality
and merely collateral and purely ancillary to the contract suchas would come under the instances previously given, it will notfollow that the contract is void and cannot be enforced.
In these circumstances it is necessary to find whether our MoneyLending Ordinance, No. 2 of 1918, intended to prohibit the contract ofmoney lending expressly or impliedly, unless the contract conformed tothe requirements of the terms set out in sections 8, 10, and 13. Thepreamble of the English Money Lenders’ Act of 1900 says that it was anAct to amend the law with respect to persons carrying on business asmoney lenders. Our Ordinance sets out' that “ it is necessary thatprovision should be made for the better regulation of money lendingtransactions”. It will be seen that the formula adopted in our Ordi-nance is in regard to the controlling of the transaction itself and not forthe purpose of revenue; in the English Act the purpose is not set out,but nevertheless in the decisions I have quoted the English Courts wereof opinion that the English Act was passed for the sole purpose of protect-ing the public. I think I am justified therefore in holding that the purposeof our Ordinance was also for the protection of the public.
Now although our Ordinance does not expressly prohibit a moneylending transaction, it imposes penalties on the money lender for notcomplying with the formalities set out in sections 8 and 10. If the loanwas secured by a promissory note, the note had to separately and dis-tinctly set forth the particulars enumerated in section 10, sub-section (1).If the note failed in these respects, then under sub-section (2) the note
KOCH A.J.—Sockalingam Chettiar v. Ramanayake.
was not enforceable, and if the particulars required to be supplied onthe note were such as are contemplated in sections 13 and 14 the moneylender was guilty of an offence and liable on conviction Jo payment ofa fine not exceeding Rs. 500, and in the event of a second or subsequentoffence to a fine not exceeding Rs. 1,000 or simple imprisonment notexceeding six months.
If the transaction was not accompanied by the taking of a securitysuch as a promissory note or other obligation, the transaction would be asimple loan and regulated by the provisions of section 8.
This section in sub-section (1) requires a regular account to be keptof each loan in the manner set out in a book paged and bound as required.If this is not done, sub-section (2) prevents the enforcement of anyclaim on the loan transaction. Section 9 requires the money lenderto furnish the particulars in (a) and (b) to the borrower if wanted, andsub-section (2) prescribes a penalty of a fine for failure thereof. Thesesections in our Ordinance make it manifestly clear that the intentionof the legislature was the protection of the public and made both thenote and the claim on the loan unenforceable in case the money lenderwas guilty of breaches of the requirements I have just referred to.
Had the legislature not expressly provided for the unenforceabilityof claims under a loan or promissory note transaction as it has done insection 8 (2) and section 10 (2), I should still, on the strength of thedecisions in the English cases enumerated by me, have arrived at theconclusion that the intention of the Ordinance by reason of its preamble,purpose, and the penalties prescribed for breaches of formalities, is torender illegal and void the contract between the parties.
The learned counsel for the respondent relied on a number of Englishcases, which I fear do not cany him far enough to overcome the principlesset out in the decisions I have dealt with in considering the position ofthe appellant. He cited the cases of Maddison v. Alderson1 and Morris v.Baron & Co.‘. The former was considered by their Lordships in thelatter case, who were of opinion that the point raised was in respect ofsections 4 and 17 of the Statute of Frauds and section 4 of the Sale ofGoods Act, and that the contract therefore was not void but only unen-forceable. Lord Dunedin on page 24 stated that he agreed with LordBlackburn and Brett L.J. that the contract was neither void norillegal but the effect was to render the kind of evidence requiredindispensable.
The case of Mellis v. Shirley ‘ was on a different statute, viz., the PublicHealth Act of 1875. This statute required “that no officer or servantof the Health Department shall be concerned or interested in anycontract outside the Department, and if so he shall be incapable of holdingoffice thereafter, and a forfeit of £50 was prescribed”. It might havebeen supposed that there can be a penalty without a prohibition of thecontract and that this was a case of only a personal prohibition enforcedby a personal penalty and an outside contract was not necessarily void,but it was held however that the outside contract was void.
1 U883) 8 A. C. 467.
It, Q. /!. />. 446.
■■i. C. 1.
KOCH A.J.—Sockalingam Chettiar v. Ramanayake.
Smith v. Mawhood, (supra) was another case cited by him. Here a penal-ty was attached for a tobacconist not putting up his name over his door.
It was held that the omission did not invalidate a contract of sale by him.This is one of the cases that I would bring under head 4 of my categoryof legal deductions, but the learned Judges also held in this case thatif the intention of the legislature was to prohibit the contract althoughfor revenue purposes, the contract would be illegal. This would comeunder head 1.
The case of Taylor v. Great Eastern Railway Co.' was also cited. Herethe point taken was again under the Sale of Goods Act, and the casewill not therefore apply.
The remaning case relied on by respondent was Sutton v. Toomer (supra)
I have dealt with this case at the commencement of my judgment.
It has to be noted that both sections 8 (2) and 10 (2) empower theCourt to give relief against the effect of these sections, if the Court issatisfied that the default was due to inadvertence and not to any intentionto evade the provisions thereof. Can we be justifiably requested to givethis relief ? The plaintiffs belong to the community of NattukottaChetties, which has for over half a century established itself in a partic-ular quarter of Colombo and has during this period chiefly concerneditself with money lending. To imagine that these keen business menwho have their offices (kitangis) in this quarter with clerks and account-ants (kanakapulles) who record the day’s transactions in a verybusinesslike way in ledgers, journals, and cash books, have not stillmade themselves conversant with and appreciative of the obligationsprescribed under the Ordinance, is to do injustice to their intelligence.The first plaintiff himself admits that he lias been doing business inColombo for about thirty years, and presumably the second plaintiffhas also for some length of time been engaged in business here. In thesecircumstances I cannot bring myself to believe that their default wasdue to inadvertence and not to any intention to evade the provisionsof the law, and am not disposed therefore to give this relief.
A further argument was advanced by counsel for the respondentsand that was that a distinction should be drawn between the effect ofthe cases relied on by the appellants’ counsel and the legal position ofthe respondents who were actually suing not on the promissory notesor the I. O. U. but on the covering mortgage bond that preceded theloans. It is true that two or three loans were effected on the sameday as the bond, but for legal purposes these can be considered as havingbeen made in consequence of the bond, as the security provided in thebond was to cover these transactions as well. I
I must confess that I cannot appreciate such a distinction. Thebond sued upon was a covering bond for future advances, on which itdepended for its consideration. If the- loan transactions were illegaland void, the bond would be bereft of consideration and therefore itselfunenforceable. In 1918 it was argued with success before this Court
» (1901) 1 K. B. 774.
KOCH A.J.—Sockalingam Chettiar v. Ramanayake.
that in the case of a bond of the description set out above the validityof the bond under the Roman-Dutch law, which is the law affectingmortgages and hypothecations in Ceylon, depended on the considerationit received by reason of actual loans made under it, and that the bondwould be clothed with validity for legal effect as only from the actualdate of the receipt of consideration—Sithamperam Chetty v. Fernando'This finding resulted in Ordinance No. 8 of 1918, having been passed tomeet the new legal situation that had arisen, and in section 2 it enactedthat where a mortgage of immovable property is given to secure futureadvances, such mortgages shall be effective to the full extent of thecharge intended to be created thereby as against any person claimingunder any subsequent mortgage or transfer, notwithstanding that nomoney may have been actually due at the date of such subsequentmortgage or transfer. The effect of this legislation was to protect themortgagee and those whose rights flowed from him under the mortgagebond against the rights of others who acquired them from the mortgagorat a date subsequent to the date of execution of the covering bond,although no consideration under this bond had passed till after theacquisition of such rights in others. Both the decision referred to as wellas the Ordinance left untouched the rights of the mortgagee andmortgagor to the bond as between themselves, and the mortgagor cantherefore avail himself as against the mortgagee under our commonlaw of the defence of no consideration when sued on the bond. If thisplea succeeds, the bond is valueless, and if contemporaneous or subsequentloans made in the terms of the bond are invalidated, whatever thereason may be the bond cannot be sued upon owing to failure ofconsideration.
I am of opinion that for the reasons I have mentioned, as well as thosegiven by My Lord the Acting Chief Justice arising from the facts setout by him that every single loan transaction made or purported to havebeen made by the plaintiffs is illegal and void and cannot be enforcedeither by itself or under cover of the bond.
This view is supported by the decision in Bourne v. Chief Commissionerof Police' where it was held on page 1098 that a plaintiff who cannotestablish his cause of action without relying upon an illegal transactionmust fail.
The case of Cannon v. Bryce* is even more in point. It was held inthis case that if the loan was unrecoverable, the claim could not berecovered on the bond.
In view of the above considerations, I am of opinion that the appealmust be allowed, and I agree with My Lord that the plaintiffs’ actionmust be dismissed. The appellants are entitled to costs both here andin the Court below.
• 5 C. W. R. ill.
3 3 Bamewall and Aldersan 179.
3 (1910) 2 K. B. 1081.
SOCKALINGAM CHETTIAR et al. v. RAMANAYAKE et al