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Present : Bertram C.J. and Ennis J.
SOOSAIPILLAI v. FERNANDO307—D. C. Colombo, 4,133.
—Concealed fraud—Action for accounting by assignee of partner—Must plaintiff show that there had been profits to ask for anaccounting?
W and the defendant entered into a partnership as from January1, 1914, for three years by P 1. On December 11, 1914, W assignedhis interest in the partnership to the defendant by deed P 2. Byan informal document P 4a of the same day, the defendantagreed to give W one-third of the profits " that may be earnedby*. .. .the business 'carried- on under deed PI." W filed his
petition of insolvency in October, 1915, and the assignee broughtthis action on February 21, 1922, against the defendant, praying' that the defendant should be ordered to furnish an account of theprofits of the business from December 11, 1914, to December 31.1921, and subsequently added a further prayer that the de$d ofassignment P2- and the agreement P 4abe setaside,and the
plaintiff declared entitled to half of the entire business in termsof the deed of partnership P 1.
The District Judge held that P 2 was not a fraudulent aliena-tion; that the agreement P 4a was. binding on the defendant;that, it terminated on December 31, 1916, when the partnershipdeed * ceased to have any effect; that the claim up to February29, 1916, was prescribed; and as the -.existence of any profitshad not been proved, he dismissed the action.
Held, thatthe creditors were entitledto theprofitsbetween
February 21,1916, and December 31, 1916, whenthe partnership
expired underP 1; and that plaintiff wasentitledunderP 4a to
an account of the profits of the business carried on under P 1.
An assignment by sn insolvent may be impeached on severalgrounds. It may be impeached as a fraudulent preference undersection 58 of the Insolvency Ordinance, or as a voluntary settlementunder section 51. It may also be impeached if it can be shownthat apart from these sections it is in effect a fraudulent conveyanceexecuted within twelve months prior to the filing of the petition.If it was of an earlier date, the only remedy of the creditors is bya Paulian action.
THE facts are set out in the judgment.
Elliott, K.C. (with him H. V. Perera and C. W. Perera), forplaintiff, appellant.
H. J. C. Perera, K.C. (with him Samarawickreme. R. h. Pereira,and D. P. Fernando), for defendant.
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February 4, 1924. Bertram C.J.—
This is an appeal raising issues both of fact and law, but is in the 1924.main a case turning upon facts, and the difficulty that we havein the case is that it seems impossible to accept either of the con- v. Fernandoflicting stories told by the two principal witnesses. There is afurther difficulty in that another witness, whose evidence wouldhave been decisive on all the aspects of the case, has not been•called at all. We are left to piece together the truth of the storiescf witnesses whom we cannot believe.
The case originates out of the insolvency of Peter de Silva Wijeye-xatne, who was declared an insolvent in October, 1915. Theorignator of the case is the insolvent himself, and the costs of the.action are being defrayed by his wife.
The insolvent's story is as follows: He and the defendant werepartners, and had for some time been associated in a landing and.shipping business. A few months after they had entered into aformal partnership, his circumstances became embarrassed. At thetime he was approached by his partner, the defendant, and pressedto put more money into the business. He declared his inability,to do so, and was thereupon pressed to assign his share to his partner.
They consulted a well-known proctor, Mr. J. A. Perera, and theinsolvent alleges that upon this gentleman's advice, with a viewto preventing the boats and other assets of the business beingseized by the creditors of Wijeyeratne, they made an arrangementunder which Wijeyeratne was to assign his share of the partnershipto the defendant, and so to all appearances terminate his connection,with the business, but that at the same time what is described asa “ secret document” should be executed, reserving to Wijeyeratnean interest in the business to the extent of onc-third of the profit?.
The deed of assignment was prepared by. Mr. «T. A.* Perera, andwas to be executed not at his office or at the house of the partners,but, for some' reason unexplained, at the house of a relation ofWijeyeratne. Mr. A. J. Perera did not attend to attest thedocument, but handed it to a junior proctor of good position. Mr.
W. J. C. Fernando, to get it attested for him. This circumstanceis not explained, but, of course, the explanation may b.e that '
Mr. Perera had other business to attend to. When the parties met,Wijeyeratne refused to sign the deed of assignment, unless at thesame time a document was drawn up and executed securing himthe one-third of the profits which had been promised him. Mr.
W. J. C. Fernando had received no instructions on this point fromMr. Perera, but on the defendant’s admitting that there was suchan undertaking, he drew up, in a very informal way, a documentto give effect to the undertaking, andJ this was signed by thedefendant.
This is the first part of the story as told by the insolvent. We havenow to follow the second part of the story which' is concerned with26/8
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ISM* the fortune of the so-called “ secret document. ” Later on in theBertram evening of the same day Mr. J. A. Perera called upon the bankrupt
J. and learnt, apparently with some surprise and embarrassment,SootaipiUaiexecution of this document.- He asked to see it, and had some
t*. Fernando difficulty in doing so, owing to the objection of the insolvent'swife. He saw it, however, and then, according to the insolvent,pefsuaded the latter to let him take it away with a view to gettinga more formal document executed. Such a more formal document,never was executed. Very soon after this a dispute arose betweendefendant and Wijeycratne with regard to three promissory notes,amounting to Us. 25,000, which, under the arrangement betweenthe partners at the time of the partnership deed, were to have beendischarged by Wijeyeratne, but had not been discharged in accord-ance with the arrangement. There seems every reason to believethat the defendant’s complaipt was just, and I understand theDistrict- Judge so to think, but on this point there has been no issue.Mr. J. A. Perera appears to have been asked by^the defendant notto surrender the “secret document” until this question was settled.A letter requesting the return of the document P 4 was drafted by~Mr. W. J. C. Fernando for Wijeyeratne, who at this time wasinsolvent. Various evidence adduced shows that the documentwas at this time still in the possession of Mr. J. A. Perera. After-wards it was found in the possession of the defendant. This inits /main lines, is the story of the insolvent.
The story of the defendant is entirely irreconcilable with this.According to him the impending insolvency of Wijeyeratne hadnothing to do with the assignment. Wijeyeratne left the businessas -he had no time to manage it. Nothing was said about his*financial affairs. The consideration for the transfer was calculatedsimply upon, the basis of the financial position of the business.There was no stipulation at the time for any secret collateralagreement, but after the arrangement had been made and a fewdays before the execution of the assignment, Wijeyeratne came tohim and pressed him to promise him, notwithstanding the assign-ment, a share of the profits. The defendant yielded to Jusimportunities, and promised this share as “something extra.” He, declared that he regarded it as a “santosum.” When .the partiesassembled to execute the assignment, Wijeyeratne reminded himof the promise, and' said that life was uncertain and that- he wouldlike to have the promise in writing.. Defendant admitted that hehad made the promise, and Mr. Fernando accordingly reduced itinto writing, and the defendant signed it. He did not attach anygreat importance to the promise, because* up to that time on thestatement of accounts which the partners had made, there hadbeen no profits, and he regarded the promise as having relationsimply to.the duration of the partnership which had a little more;than two years to run, and it might well be that no profits would
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be .earned. At first defendant said that he knew nothing aboutthe instructions for drawing the deed of assignment, and that Mr.-Pertra was not his proctor for the purpose, but he subsequently•explained that in this he was mistaken, and that he paid Mr. Per era's•charges. This is the defendant’s story upon the first part of thecase. His story as to the second part, namely, that relating tothe “ secret document, ” is equally irreconcilable with the storyof the insolvent. As I have said the document ultimately gotinto defendant’s hands. According to the evidence called by theinsolvent-, it must have reached him through Mr. J. A* Perera.According to the evidence of the defendant, sworn, first in answerto an interrogatory, the document was handed to him by the insol*vant himself upon a settlement of the dispute about the Bs. 25,000,and it was surrendered to him as being discharged bv that agree-ment.
We now come to the findings of the learned District Judge. Withregard to the first part of the story, the learned Judge, except bnone point—a point of great importance—decisively rejects the storyof the defendant. He says ; “ The conclusion that P 4a was signedwith the object of concealing that fact from Mr. Wijeyeratne’screditors is irresistible. ” The learned Judge thus apparently meansthat the . document was to be kept secret.' He proceeds “ If not,there was no reason why Wijeyeratne should not have assignedover one-sixth instead of half by the deed of assignment, No. 448.The seizure of the boats by Wijeyeratne's creditors would havebeen disastrous to defendant. ” The learned Judge thus appearsto think that the arrangement contained in the deed of assignmentwas not the real arrangement between the parties, but only adisguise ; that according, to the real terms between them, Wijeye-ratne was to retain an interest in the business to the extent of one-third of the profits, and that this interest was to be concealed fromthe creditors. If this is really the meaning of the District Judge,I think he ought to have given judgment for the plaintiff, but headds a qualification of some importance, namely, that it is possiblethat Wijeyeratne, knowing defendant’s position, * * instead on- P 4abeing signed as a condition precedent to his executing the transfer,and defendant had no choice,. but to agree to save the businessfrom being at the mercy of Wijeyeratne's creditors. " He hereseems to imply that this document was* executed after the prepara-tion, but before the execution of the assignment. With regardto the second part of the case, the learned Judge rejects the storyof the defendant with equal decisiveness. He accepts the evidenceof Mr. W. J. C. Fernando, and it seems to me that he could notdo otherwise than accept it. He disbelieves the story that thedocument was surrendered to the defendant as a result of a com-promise, and he holds that it is entitled to any effect which maybelong to it.
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^ As I have said the learned Judge’s finding would seem to implyftMTBAir a verdict in favour of the plaintiff. The reason why the learnedC Judge does not give such a verdict is that he thinks that the defend-SooeaipiUai &nt had no desire to defraud Wijeyeratne’s creditors, but onlyv. Fernando looked to make his position safe. The learned Judge appears tohave overlooked the fact that his language implies that one ofthe terms of the agreement was that Wijeyeratne should retainan interest in the business, and that this interest was to be given himin such a form as to conceal* it from the creditors. The real questionin the case is whether this was the intention of the parties. It maybe convenient at this point to state the law. Under our antiquatedInsolvency Ordinance, which is a discredit to the Statute Bookand the occasion” of constant scandals, we are in effect adminis-tering the English principles as embodied in the Bankruptcy Actof 1849. An assignment by an insolvent may be impeached onseveral grounds. It may be impeached as a fraudulent preferenceunder section 58, and here the law applicable is the English lawfor the time being, or as a voluntary settlement under, section 51,but it may also be impeached if it can be shown that apart fromthese sections it is in effect a fraudulent conveyance. This isnowhere expressly declared by the Ordinance, but it follows from.the fact that by section 7 any fraudulent conveyance by an insolventis an act of insolvency. All acts of insolvency being offences againstthe bankruptcy law are themselves void, but ' according to theprinciples which have been followed in England, such a conveyancecannot be declared void on this ground unless the act of insolvencyis an “ available ” act of insolvency (that is to say, unless, underour own law, it was committed within twelve months prior to thefiling of the petition). If it was committed at an earlier date, theonly remedy of the creditors is by a paulian action (which in ourlaw 'corresponds to an action under the Statute of Elizabeth) withall the difficulties which that action involves. See on this pointWilliams’ Bankruptcy Practice9th cd., p. IS, and Mercer v. Peter-son 1 Shrubsole v. Sussam 2, Allen v. Bonnett 3, Jones v. Harber 4, andExparte Games s.
To return to the facts. As I have said the real question is whetherit was a secret term of the assignment of the insolvent’s interestthat he should retain a right to one-third of the profits which shouldbe put in such a form that it could be kept concealed from thecreditors. If this, was the real intention, then, under whateverpressure that intention was formed, its object was to defraud thecreditors …. Nevertheless, on a careful consideration ofthe evidence, I am not satisfied that there was any secret term inthe arrangement for the assignment, nor am I satisfied that it was
« L. R. 6 Q. B. 77.
1 L. R. 2 Ex. 304.
* 16 C. B. N. 8. 462.
* 22 Ch. D. 314.
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the intention of the defendant that the document P 4a should bekept as a secret document.
1 have very little doubt that the defendant gave the doeumentbecause he wished at all costs to avoid the seizure of his ocats byWijeyeratne's creditors, but I am not satisfied .that there was anyfraudulent arrangement between him and Wijeyeratne that thedocument should be kept secret.
This brings us to the question of the effect of the document and,in particular, as to the point from which its operation begins andthe point at which its operation ends. The document was executedon December 11, 1914, and the action was instituted on February 21,1922. It is agreed that in the absence of concealed fraud anyclaim must be prescribed to profits which were earned earlier thanFebruary 21, 1916. Concealed fraud* in my opinion, is not madeout. The right to profits then must start from February 21, 1916,but to what period does it extent ? This is a question of theinterpretation of the document, and it is by no means an easyquestion.- The promise is to give one-third share of the profitsthat may be earned by the Colombo Landing and Shipping Agencyin the business carried on under deed No. 740 dated January SO,1914, attested by Mr. J. A. Perera, Notary Public. Does thereference to the partnership deed in this document import a limitationto the period during which the deed or partnership was to run ?Or, do the terms of the document give to the insolvent an unre-stricted right to a share of the profits as long as the actual business,from which he was retiring, was carried on ? We cannot, unfortu-nately, ask ourselves what the parties must have intended,, becausewe must judge by the terms of the document which they executed,it is highly probable that neither of them fully thought out whattheir intention was, and it is singular that Mr. Fernando, whodrew it up for them, did not ask them further to define their intention.Certainly it would be a singular promise to make on the part of thedefendant that for a wholly indefinite period as long as he carriedon the business from which his partner was -retiring, the latterwould receive a one-third of the profits, and not be responsible forany of the losses. On the whole, 1 have come to the opinion thatthe -reference to the partnership deed imports a reference to- theduration of the partnership under that deed. On this view of thecase the creditors are entitled to any profits between February . 21,1916. and .December 31, 1916, when the partnership would haveexpired.
On the question of this right to* the profits, the learned Judgehas given certain rulings which I am unable to follow. He hasruled that inasmuch as the insolvent is not an actual partner, theassignee cannot claim an account of the profits unless he shows
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that) profits were in fact earned. He further rules that inasmuch,as the plaintiff obtained discovery of the. defendant's bobks forcertain purposes not defined in the record, he had an opportunityof ascertaining whether profits were in fact earned, and that the onusof proving profits consequently lay upon him, and as he has notproved the existence of profits, and as there are certain circumstanceswhich suggest that there were no profits, his claim to.an accountmust be dismissed. I am entirely unable to follow this reasoning.The assignee, as representing the insolvent, is entitled under this,document to any profits earned by the business for a specifiedperiod, in my opinion he is entitled under that document to an*account j>i the profits of the business carried on under the partner-ship deed from February 2^, 1916, to December 31, 1916, and thecase should be sent back to the learned District Judge to enablethat account to be rendered,, and j>o enable the plaintiff, if he so.desires, to surcharge and falsify, and judgment should be ultimatelyentered up on the footing of that account.
The plaintiff has asked for any directions as to 'the manner in.which the account should be taken, and, in particular, as to whetherin taking the account the allowance of 12 per cent. of interest oncapital, which under the practice in force between the partnershad been made before the assignment, should be continued. Ithink that it would be convenient that we should give si directionon this point. I do not myself see how it can be left out of accountthat as between the partners it had been customary to allow 12per cent, for interest on capital before estimating profits. I thinkthat in taking the account, the learned Judge should follow the*same practice.
Ennis J.—His v Lordship stated the facts, and after discussingother issues continued:—
With' regard to the. claim for an account on the learned Judge’sfinding, the plaintiff was entitled to an account from February 21,1916. to December 31, 1916, and I am of opinion that* the learnedJudge was wrong in holding that the plaintiff had to prove thatthere was a profit. It is true that there was an issue as to theamount of the profits, if any, and there is general evidence that therewere no profits. The Judge has answered the issue holding thatthere ’were no profits, and that the business resulted in a lossup to the end of 1921. The defendant does not appear to have beenin any way reluctant to let the assignee see his books. He appearsto have allowed, at the request of the plaintiff, an accountantto see the books, but. we are told by the counsel for the appellantthat the books for 1914 only were seen. The petition of appeal
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•says that the issue was regarded at the trial as a preliminary one 1924*which could be gone into only when it was decided that the plaintiff El^"j
was entitled to an account. ’
I would uphold the learned Judge’s findings in all other respects, Vt Fernandoand, while setting aside the decree, direct, using the terms of (iheprayer in the plaint, the defendant to furnish an account of theprofits ot the business from February 21, 1916, to December 31,
1916. It is possible that* no further proceedings will be necessary, ‘ss the assignee and the defendant- may agree as to whether therewere any profits, and if so, what.
As to costs I agree with the order proposed by my Lord theChief Justice.
SOOSAIPILLAI v. FERNANDO