JANSZ, Appellant, and WEERASEKERA et al., Respondents

014-NLR-NLR-V-52-JANSZ-Appellant-and-WEERASEKERA-et-al.-Respondents.pdf

Present: Basnayake J. and Gratiaen J.
JA3STSZ, Appellant, and WEERASEKEBA et al., RespondentsS. G. 24:5.—D. G. Colombo, 5777j Insol.
In the matter of the Insolvency of Bertram Clifford Janszof Pamankade Lane, Wellawatta, Colombo
Insolvency Ordinance—Fraudulent preference—Possible even when there is no -moralblame—Refusal of certificate of Conformity*—Extenuating circumstamr.es—Sections 58 and 151.*
A fraudulent preference need not involve any moral blame at all, and aninsolvent will be guilty of it if, for example, he makes payment to his creditorsinfluenced by the property of some and out of gratitude to others.
Where fraudulent preference is proved but there are extenuating circumstancesan insolvent will not be refused a certificate of conformity for all time.
^^PPEAL from an order of tlie District Court. Colombo.
S. Nadesan, with M. A. M. Hussain, for insolvent appellant.
S. J. Kadirgamar, with R. S. Wanasundera, for opposing-creditorrespondent.
Cur adv. vult.
September 28, 194=9. Basnayake J.—
The appellant (hereinafter referred to as the insolvent) appeals from theorder of the District Judge refusing him a certificate of conformity andwithdrawing the protection from arrest granted to him under section 36of the Insolvency Ordinance.
Objection has been taken to the grant of a certificate of conformity byone Verona Florence Weerasekera, a creditor (hereinafter referred to asthe opposing-creditor) to whom a sum of Rs. 1,950 is due on a promissorynote dated December 4, 1945. The grounds on which her objection isbased are as follows : —
“ (1) Tlie insolvent has, in contemplation of insolvency or with theintent to defeat the object of the Insolvency Ordinance, concealedpart of his property.
The insolvent has contracted debts under false pretences andhas by false pretences obtained the forbearance of his creditors.
The insolvent has within two months next preceding the filingof the petition for sequestration of his estate, fraudulently in contem-plation of insolvency and with intent to diminish the sum to be dividedamong his creditors, or to give undue preference to some of his creditor,has paid some creditors wholly or in pai-t and has made away with partof his property. „
The insolvent has under his insolvency attempted to account forhis property by fictitious losses.
The insolvent has not made a full and true disclosure of all hismatters and assets. ”
One Richard James Norton Weerasekera, a brother of the opposing-creditor, has given evidence on behalf of the opposing creditor. Hedetails the circumstances in which the opposing creditor case to make theloan to the insolvent. He says that the insolvent whom he had knownfor about 15 years came to see him in December. 1945, and told him that-
Ihe was in debt and that if his father came to know about it he would -bein a bad way, but that if he managed to clear his debts his father wouldtake him on as a partner in his father’s business. The insolvent wantedEs. 1,500 to clear all his debts. The witness knew that the insolvent’slather was a prosperous business man and says he believed him. Thewitness therefore arranged for a loan from his sister, the interest charged•being 15 per cent, per annum. The witness says: “I would not havegiven this money to him if I knew that the representations he madewere false”. The evidence of this,*witness does not in my opinion support-the allegation that the opposing creditor was induced to lend the moneyon false representations made by the insolvent to her, nor is there anyevidence to the effect that the witness acted as an insolvent’s agent ormade any false representations on his behalf and thereby induced theopposing creditor to lend the money.
On the evidence of the witness Richard James Norton Weerasekerathe learned District Judge holds that the opposing creditor was inducedby her brother, the witness, to make the loan on the false representationsmade to him. He says: “I accept this evidence and find that, apart fromthe insolvent having been unable to give a satisfactory explanation forthe full Rs. 5,000 that came into his hands as commuted pension aboutthree months prior to his coming to the Insolvency Court, the insolventon his own admission, has given undue preference to some of his creditors.I also find on the evidence of Mr. R. J. N. Weerasekera that the insolventhas been contracting the debt of Miss Weerasekera by fraud and by meansof false pretences, and that on this ground he is not entitled to a certificateof conformity.”
I am unable to agree with the learned District Judge that in theinstant case it is established that the insolvent contracted the debt withthe opposing creditor ‘by fraud and by means of false pretences”, noris there any evidence to support objections '1), (4), and (5) mentionedabove. The only question that merits examination is the question of‘' fraudulent preference ’ ’.
I shall first discuss the meaning of the expression ‘‘fraudulentpreference” and then consider whether the evidence discloses that theinsolvent is guilty of fraudulent preference. In our law the expression“fraudulent preference” bears the same meaning that it bears in Englishlaw at the corresponding period of time.1
A “fraudulent preference” is well known to the law of bankruptcy.Tt arises where the debtor, in contemplation of bankruptcy—that is,knowing his circumstances to be such as that bankruptcy must be, or- willbe, the probable result, though it may not be the inevitable result—doesex mero motu, make a payment of money, or a delivery of property to acreditor, not in the ordinary course of business, and without any pressureor demand on the part of the creditor2. The elements v'hich go to make upa> fraudulent preference are two:first insolvency—inability on the
debtor’s part to pay his debts as they become due, from his own moneys—;and, secondly, a payment to a creditor with a viewr to giving him apreference over the other creditors. Preference given to a creditorifrom a mere sense of duty of honour will rft>t prevent the transaction
Section 58, Insolvency Ordinance.
Nunes v. Carter, I. L. It. jp. C. (1865-67) 342 at 348.
being a fradulent preference.1 It is the duty of a debtor who is unableto pay his debts as they become due not to interfere in any way amongst,his creditors. If he interferes in any way in order to give an advantageto one creditor over the others, he cannot escape the consequences of hisact.2 An insolvent is not free to pay some only of his creditors, eventhough it be in part, during the two months preceding his adjudicationon the ground that they had done him services or because they were-friendly to him and because he liked them better than his other creditors.He cannot be allowed to anticipate tha fiction of the Bankruptcy Courtwith an intention of preferring one of his creditors to another and virtuallytake the administration of his estate out of bankruptcy into his own hands,preferring one creditor to another, even though the creditors whom hepaid might or would be entitled to priority in the bankruptcy.3
It should be observed that although the early English legislationdescribed the preferring of creditors by a bankrupt in contemplation ofbankruptcy as a fraudulent preference the act need not be accompanied byany fraud practised on the creditors. Maugham J. in the case ofRe Patrick and Lyon Ltd. observes “ A fraudulent preference ….possibly may not involve any moral blame at all; for example, there maybe a discrimination between creditors, irrespective of pressure, on grounds-with which most people would sympathise ’ ’. The debtor may be-influenced by the affluence of his other creditors and, as in the instantcase, by the poverty of the preference; or again, as in the instant ease,by gratitude to some of the pi’eferees.
The petition to have the appellant adjudged insolvent was filed on?January 20, 1948. At 1.30 p.m. on the same day the appellant filed hisdeclaration of insolvency and asked for protection. On theserepresentations the District Judge made order on the same day adjudging-the appellant an insolvent and ordered that his estate be placed undersequestration in the hands of the Fiscal. There is proof that the appellant,through the very proctor who filed his declaration of insolvency, paid,certain sums of money to some only of his creditors within two months5 ofhis adjudication.. The payments made by the appellant’s proctor are as
follows : —
NameAmount due Amount paid~
_Rs.Us.
A. Nanayakkara………400…150
Etta de Silva………1,250…750
Q. R. de Silva………500…250
P. F. &. Fernando..,……200…50
Sayed Karim Bbai………375…150
P. T. P. Gnnaratnc………400…200
P. Don Albert^………200…100
M. de Zilva*………150…100
S. Guluvite……750…250
4,2252,000
Of the above payments two at least were paid on the very day theappellant was adjudged insolvent. The actual dates of the other payments-1 Re V in'roe and Davf.es, cex parte Viney, (1894) 1 Mans. 416.
In re Skeqg, (1890) 59 L. J. 546 at 548.
In re Bryant, (1895) L. R. 1 Q. B. D. 420.
(1933) I. R. Oh. 790.
Secti on 751 (4) of the Insolvency Ordinance.
are not stated in the l:st filed by the appellant's proctor, nor have 1 beenable to find any receipts for them in the record.
. The appellant’s explanation as to why he preferred certain creditorsto others is in his own words as follows:
“ I released Us. 2,000 to Mr. Stave so that he might come to somesort of settlement with my creditors. He has distributed thatUs. 2,000. I have got the names of the persons to whom this money wasdistributed. They were good friends of mine and they wanted fullamounts.”»
Ercru the foregoing it appears that the insolvent has deliberatelyin contemplation of insolvency with patent to give an undue preference tocertain of his creditors paid them in part—a course of conduct which thelaw of insolvency declares to be an offence. But what is surprising in-fills case is the action of the insolvent’s proctor, who, without advisingthe insolvent as to the proper course he should take, himself undertookto act for him in distributing the sum of Its. 2,000 among his creditors ata time when he appears to have known that) the appellant was about todeclare himself insolvent. His conduct needs explanation. Even on thevery day the appellant was adjudged insolvent, the appellant’s proctormade a payment of Its. 100 to a creditor to whom only Es. 150 was due.The appellant’s instructions were written on paper bearing bis proctor’sname and address and read:
“ Mr. Stave.
I owe this body Rs. 150. Please pay him Us. 100 as this is a verydeserving case.
(Sgd.) ” and dated 28.1.48..
The receipt dated the same date on the same paper is as follows :
“ Received Its. 100 from Proctor Stave on behalf of Mr. B. C. Jansz.
M. de Silva28.1.48.”
The insolvent had no right to make payments to his creditors in (he wayhe did influenced by the poverty of some and out of gratitude to others.I am therefore unable to hold that the- learned District Judge is wrong inrefusing him a certificate and withdrawing his protection under section 151of the Insolvency Ordinance..
But having regard to the circumstances of the instanti case I do notthink that the insolvent should be refused a certificate of conformityfor all time. The insolvent is 43 years of age. He started life as a Clerkin a Bank on a salary of Its. 50 per month. Thereafter in 1922 he joinedthe Railway Department as an Inspector of Railway Telegraphs on astarting salary of Rs. 80 per month, and later in the year 1927 he becamean Inspector of Telegraphs of the Post and Telegraph Department on,a starting salary of Re. 103 per month. He married in the year 1933and has three children of the ages of 13, 10, and 7—two gills and a boy.They are being educated at Ladies' College, Colombo.
In the year 1939 he was in difficult; financial circumstances and wascompelled to borrow, for the first time to nfeet the expenses connectedwith the illness of^his uncle who was staying with him. The insolvent’s
-domestic budget was strained by the fact that he had also to support hismother-in-law and brother-in-law. The insolvent's father is a prosperousbusiness man with trading establishments at Wellawatta and Nugegoda,but ho says he is unable to turn to hm for the solution of his financialtroubles because he had incurred his displeasure on his marriage withouthis approval.
The insolvent’s creditors are Chettiars, Afghans, and others, andthe rates of interest charged by them range from 120 to 200 per cent.
In 1941 the insolvent’s wife took employment in the Naval Office on a■salary of Us. 200 in order to alleviate their financial difficulties. Hiswife’s services came to an end in 1944 owing to her illness. In 1946she again sought employment and she is .now employed at Lee Hedges.& Co.•on a salary of Rs. 60 per month and a cost-of-living allowance of Its. 56.
Owing to financial worry he ran down in his health and retired fromGovernment Service in the year 1947, having been condemned by a medicalhoard as unfit for work. He drew as commuted pension and retirementallowance a sum of about Rs. 5,000. It is Rs. 2,000 of this sum that hehanded over to his proctor for settlement among some of his creditors
The insolvent says that he never gambled on .the racecourse orotherwise and that his present financial difficulties are due entirely tomisfortune. His monthly pension together with the cost-of-livingallowance is Rs. 124.85, and his wile’s income is Rs. 105.50 with allowance.His father pays him Rs. 50 a month on account of his children’s schoolingand has given him a house to live in free of rent-Having regard to the above facts I think it is sufficient if the issue ofthe insolvent’s certificate is suspended till he brings into court a sum ofRs. 2,000, which is the amount he took upon himself to distribute among■some only of his creditors, either a lump or in monthly instalments ofRs. 100. The first of such instalments is to be paid within thirtydays from the day on which this judgment is communicated to him bythe learned District Judge and the subsequent instalments monthly onthe date corresponding to the date on which the first instalments is paid inpursuance of this order. I order that upon the completion of the payment■of. that sum the insolvent be granted a certificate of eomformity if mean-while he does not do anything to forfeit his claims to it on any otherground or any other circumstance which disentitles him to a certificateis not disclosed. The District Judge should determine the class of thecertificate on the material before him at the time he grants it. Theinsolvent has undertaken to pay monthly a sum of Rs. 50 for the benefitof his creditors. The record indicates that he has in pursuance of thisundertaking made certain payments, which should be credited to theamount I have ordered him to pay, i.e., he will pay Rs. 2,000 less anysum he has already pa:d in instalments. The insolvent shall be intitledto protection from arrest pending tbe grant of a certificate of conformityso long as he duly complies with the order I have made.
The respondent is entitled to the costs of this appeal.
•Gratiaen J.—I agree.
Order varied.