The Chartered Bank v. Rodrigo.
1940Present : Howard C.J. and Keuneman J.
THE CHARTERED BANK v. RODRIGO.
68—D. C. Colombo, 8,482.
Insolvency—Fraudulent preference—Deposit of scrip by insolvent with Bank—Authority to sell—Claim by assignee to proceeds of sale—Right of Bank.
Where the plaintiff Bank, with whom scrip relating to shares in acompany was deposited by the first defendant by way of security for anoverdraft with written authority to dispose of the shares, sold the shares• and appropriated the proceeds in reduction of the overdraft,—
Held, that there was no fraudulent preference of the Bank, and thatthe Bank was entitled to the proceeds of the sale as against the seconddefendant, the assignee of the insolvent estate of the first defendantwho claimed them for the benefit of the insolvent estate.
PPEAL from a judgment of the District Judge of Colombo.
N.Nadarajah (with him E. B. Wikremanayake), for second defendant,appellant.
H. V. Perera, K.C. (with him N. K. Choksy and Miss Metha)-, for theplaintiff, respondent.
(102S) 21 B. IF. C. V. 32.
– (1929) 22 B. II'. C. C-. 431.
HOWARD C.J.—The Chartered Bank v. Rodrigo.449
March 6, 1940. Howard C.J.—
This is an appeal by the second defendant who is the assignee of theinsolvent estate of the first defendant from a judgment‘of the DistrictJudge of Colombo, dated December 12, 1938, in favour of the plaintiff forthe sum of Rs. 108,631.98 with costs. The facts so far as material tothis appeal are as follows:—By a bond or obligation No. 747 datedDecember 20, 1934, the first defendant gave to the plaintiff a floatingsecurity to secure the payment of sums then owing and of future over-drafts over certain immovable property set out in the schedule. Asfurther and additional security to the plaintiff for the payment of moneysowing under bond No. 747 the first defendant deposited with the plaintiffby way of pledge and hypothecation the share certificates specified in thesecond schedule to the plaint together with relative transfers executed bythe first defendant. In the District Court the appellant did not contestthe whole of the plaintiff’s claim. He maintained (1) that the deposit ofthe share certificates and transfers specified in schedule “ A ” to theamended answer amounted in law to a fraudulent preference of theplaintiff by the first defendant and (2) that as assignee in. insolvency hewas entitled to a declaration as against the plaintiff that a sum ofKs. 6,709.09 specified in schedule “ B ” to the amended answer should bepaid to him for the benefit of all the creditors of the insolvent estate of thefirst defendant. It was also claimed by the appellant that the goods andproperty specified in schedule “ B ” of the amended answer were surren-dered by the first defendant to the plaintiff in circumstances amountingto a fraudulent preference of the plaintiff by the first defendant. Thelearned District Judge has answered all the contentions of the appellantin favour of the plaintiff. So far as the question of fraudulent preferenceis concerned it appears from the evidence of the first defendant that from1934 onwards his financial condition was getting progressively worse. OnDecember 1, 1937, he states that his liabilities far exceeded his assets,'that his condition was hopeless and that the plaintiff Bank was financinghim. It was in these circumstances that he visited the plaintiff Bank,saw the Manager and handed over the share certificates, his only un-encumbered assets apart from his existing stocks of tea. The depositof these certificates was . made by the first defendant with a two-fold-purpose. Firstly because, the Bank had informed him that his overdrafthad increased beyond the authorised limit and it required furthersecurity. And secondly—and on the evidence it is transparent that thiswas the main purpose—to secure a further advance of Rs. 2,500. Onhanding over the scrip the first defendant was accommodated by theplaintiff Bank by the cashing of his cheque for Rs. 2,500.
The facts with regard to the goods and property specified in schedule“B” of the amended answer are as follows:—The arrangements withregard to the disposal of the proceeds derived from the sale of the Tripolitea are contained in the documents 10, 10a, 10b, 10c. From these docu-ments it would appear that on December 14, 1937, the first defendantinformed the plaintiff Bank that he had instructed his agent in Tripoliand his associates in Paris and the Banco di Roma, Tripoli, to hold the
17J. N. B 17627 (5/52)
HOWARD C.J.—The Chartered Bank v. Rodrigo.
balance proceeds of sale arising from a consignment of tea sent to Tripoliat the disposal of the plaintiff Bank. The latter was also authorized bythe first defendant to collect these proceeds which, so it would appearfrom 10a, 10b, and 10c, were then lying in the Banco di Roma, Tripoli,the balance amounting to Rs. 2,476.84 from the sale of the Tripoli teawas eventually received by the plaintiff Bank on April 9, 1938, and wentin reduction of the first defendant’s overdraft.
The amount of Rs. 17.60 referred to in schedule “ B ” of the amendedanswer represented a dividend from the Forest Hill Tea Company sharestransferred to the plaintiff Bank on December 1, 1937. This dividendwas paid on April 19, 1938, and went in reduction of the first defendant’soverdraft.
The transaction with regard to 43,467 lb. of tea was arranged aboutJanuary 17, 1938, with a certain Mr. Henry of the plaintiff Bank who onthat day visited the first defendant’s store. In consequence of anagreement reached on that day the first defendant sent R. Gordon & Com-pany 43,467 lb. of tea. The Manager of the plaintiff Bank states that thetea was handed over to R. Gordon & Company to be held by them for theBank because the latter was afraid it might disappear if it remained inthe first defendant’s’ hands. The instructions given by the first defendantto R. Gordon & Compnay are contained in P 11 and are to the effect thatthey should receive the tea into their godown and hold it for the accountof and at the disposal of the plaintiff Bank. This tea was eventually soldand credited to the account of the first defendant on April 22, 1938.
The Manager of the Bank explains the handing over of the 2,525 teacoupons as being in response to a request made to the first defendant inJanuary, 1938, by the Bank who wanted to get as much security aspossible into their hands. These coupons were sold and the proceedscredited to the first defendant’s account on April 5, 1938.
The learned District Judge has held that neither in the case of the sharesspecified in schedule “A” nor in the case of the goods mentioned inschedule “ B ” of the amended answer do the circumstances in which theybecame vested in the plaintiff Bank amount to a fraudulent preference.In order to constitute a fraudulent preference four conditions must besatisfied. (1) The debtor at the date of the transaction must be unableto pay from his own money his debts as they fall due, (2) the transactionmust be in favour of a creditor or of some person in trust for a creditor,
the debtor must have acted with the view of giving such creditor or asurety or guarantor for the debt to such creditor a preference over hisother creditors and (4) the debtor must be adjudged bankrupt on abankruptcy petition within three months after the date of the transactionsought to be impeached. In this case conditions (1), (2), and (4) have beensatisfied. The question that arises for decision is whether the learnedJudge was right in holding that these various transactions were not madewith a view to giving the plaintiff Bank a preference over other creditors.The English cases lay down the principle that the whole question turnson the intention of the trader in disposing of his goods to a particularcreditor. Turning to the present case the intention of the first defendant
HOWARD C.J.—The Chartered Bank v. Rodrigo.
in handing the shares over to the plaintiff Bank was not to give apreference to the latter but to obtain more credit. So far as the teacoupons and stocks of tea handed over to R. Gordon & Company and theproceeds of the sale of the Tripoli tea are concerned, the placing of themat the disposal of the plaintiff Bank was at the instance of the latter andin view of the fact that the overdraft had exceeded the authorised limit.If the first defendant had not taken this step, there was a danger of hiscredit being stopped by the plaintiff Bank with grave danger to hisbusiness. In these circumstances the second defendant did not provethat the intention of the first defendant was to give a preference to theplaintiff. The learned District Judge was, therefore, correct in holdingthat there was no fraudulent preference.
There remains for consideration the question as to whether the goodsspecified in schedule “ B ” of the amended answer vested in the seconddefendant by virtue of section 70 of the Insolvency Ordinance (Chapter 82)and, therefore, the plaintiff Bank received the proceeds of the sale of suchgoods including the dividend from the Forest Hill Tea Company as agentsof the second defendant. Counsel for the plaintiff Bank has claimedthat the title to (a) the tea coupons, (b) the tea, (c) the Tripoli debt passedto the Bank on the dates when the various arrangements were made forplacing this property at the Bank’s disppsal. Alternatively, then, goodswere given by the first defendant to the Bank by way of security, that is,as a pledge. In my opinion the evidence does not prove that full titlein the goods passed to the plaintiff Bank. It is, however, established thatthey were allocated by the first defendant to the Bank by way of securityagainst the overdraft. In this connection it is material to consider theform in which the various transactions took place. The tea couponswere handed over to the plaintiff Bank, while the tea itself was deliveredto R. .Gordon & Company on behalf of the Bank. In these'circumstancesunder section 18 (a) of the Registration of Documents Ordinance thetransaction was complete without being in writing and without registra-tion. The Tripoli debt was a “ chose in action ” and hence exemptedfrom the provisions of the Registration of Documents Ordinance byvirtue of section 17 (2). The right to take the dividend from the ForestHill Tea Company passed .to the plaintiff Bank when the shares them-selves vested in the latter. The form in which the various deals withregard to the property specified in the amended answer were transactedwas therefore in accordance with the law.
The remaining question now – requiring elucidation is whether thosetransactions conferred on the plaintiff Bank the right to sell this propertyon the insolvency of the first defendant. The matter is discussed inWille on Mortgage at pages 175-183. Generally speaking, it may be saidthat the pledgee on default may not sell the secured property unless thepledgor consents. In Hongkong & Shanghai Bank v. Krishnapillai1 itwas held that a Bank, with whom scrip relating to shares in a Joint StockCompany is deposited by way of security for an overdraft, with writtenauthority to dispose of the shares by sale or transfer, has no right todispose of them without the intervention of Court, where the assignee
1 33 N. L. B. 249.
SOERTSZ J.—Nelson v. Foenander.
in insolvency objects to such a course. In the present case the plaintiffBank had the written authority of the first defendant to dispose of thegoods. Their sale has been effected by the plaintiff and is not impugnedby the second defendant who merely claims that the proceeds should beapplied for the benefit of the insolvent’s estate. In these circumstancesI think the plaintiff Bank is entitled to show that it had a preferred claimto apply those proceeds in reduction of the first defendant’s overdraft.
For the reasons I have given, the appeal is dismissed with costs and thejudgment of the District Court affirmed.
Keuntbman J.—I agree.
THE CHARTERED BANK v. RODRIGO