After the plaintiff’s case was closed, the defendants moved toadd two further issues, namely : —
“ (3) Does the evidence led so far prove that the plaintiffcarries on the buiness of a money lender ?
(4) If so, can the plaintiff have and maintain this actionunder section 8 of the Money Lending Ordinance ? ”
The 1st and 2nd defendants, giving evidence, denied the exe-cution of the promissory note P2 but the learned District Judgehas disbelieved their evidence and held that the defendants havesigned P2. In the light of the expert evidence led in the case,we see no reason to disagree with the learned trial Judge’sfinding of fact. He has, however, answered the additional issues3 and 4 in favour of the defendants, namely, that the plaintiffcarried on the business of money lending and that he cannot
DEHERAQODA, J.—Perera v. Peiris
maintain this action as he had failed to maintain proper accountsin relation to^ the loans as required by Section 8 of the MoneyLending Ordinance (Chap. 80, Volume 3 of the LegislativeEnactments). Answering issue 2. he held that no sum was payableby the defendants to the plaintiff, following upon his answersto issues 3 and4, and dismissed the plaintiff’s action but withoutcosts, as the plaintiff had succeeded on the facts.
The defendants did not adduce any independent evidence ofthe nature or extent of the money lending transactions of theplaintiff and relied solely on the plaintiff’s evidence to supportthese two issues and in appeal, learned Counsel for the plaintiff-appellant contends that the burden of proving that P2 is a moneylending transaction and that the plaintiff is a professional moneylender is on the defendants and that they have not dischargedthat burden. His position is that the defendants relied only onthe evidence of the plaintiff to prove both these matters and thatthe transactions referred to in the plaintiff’s evidence are notsufficient to prove either that P2 is a loan transaction or that theplaintiff is a person who carries on the business of money lend-ing. He cites in support of his contention a passage from thejudgment of Lord Devlin in Chow Yoong Hong vs. Choong FahRubber Manufactory (1961) 3 A.E.R. 1163 at 1166, where hesays:—
“The only feature of these transactions of the secondgroup that makes it possible even to argue that they aremoney lending transactions is the post-dated cheques givenby the defendants. These are represented in the argumentfor the defendants as promises of repayment and the cashpaid for the customer’s cheque is said to be a loan. TheirLordships are satisfied that the post-dated cheques do notaffect the nature of the transaction.
“ Even if the post-dated cheque did produce an excess thatis not “ interest ” within the definition unless there is a loan.As in the case of the second group of transactions, theirLordships have looked in vain in this first group for anythingthat can fairly be represented as lending of money by theplaintiff and the promise to repay. The fundamental errorthat underlies the defendants’ case on both groups of chequesis that because they were, so they say, in need of readycash, and because the plaintiff supplied them with it andmade, if he did, a profit out of doing so, therefore, there wasa loan and a contract for its repayment. ”
DEHERAGODA, J.—Perera v. Petris
There is, however, another passage at page 1167 which runsas follows : —
“ If in form it is not a loan, it is not to the point to saythat its object was to raise money for one of them or thatthe parties could have produced the same result more conve-niently by borrowing and lending money. But if the Courtcomes to the conclusion that the form of the transaction isonly a sham and that what the form of the transaction isa loan which they disguised, for example, as a discountingoperation, then the Court will call it by its real name and actaccordingly. ”
As to what is discounting and what is interest he says : —
“ When a payment is made before due date at a discount,the amount of discount is no doubt often calculated by re-ference to the amount of interest which the payer calculateshis money would have earned, if he had deferred paymentto the due date. But that does not mean that' discount is thesame as interest. Interest postulates the making of a loanand then it runs from day to day until repayment of the loanits total depending on the length of the loan. A discount is adeduction from the price once and for all at the time ofpayment. ”
Now, let us consider in the light of these dicta as to whetheron the evidence of the plaintiff there is an element of a loan inthe transaction referred to. It is the plaintiff’s evidence that hereceived post-dated cheques from the defendant and that hechased these cheques on the basis of a discount of Rs. 10 “ascommission ” (as he called it) per thousand rupees per week andhe continued to do so in relation to the 1st defendant for aboutone year. He paid the plaintiff less than the amount representedin the cheques depending on the period resulting from the post-dating. It is possible, therefore, to take the view that this is adeduction from the price fixed once and for all at the time ofpayment and, therefore, not a loan at that stage, the mode ofdetermining “ the once and for all ” payment being irrelevantfor this purpose. If then the transaction was not a loan or amoney lending transaction at that stage, does it become a moneylending transaction by the subsequent execution of the promis-sory note P2 ? P2 no doubt, on the face of it, states that the twodefendants “ borrowed and received ” the sum of Rs. 33,000 c/utit is the evidence of the plaintiff that the amount of the promis-sory note represents the amount due on the dishonoured chequeswith interest added for the period between the date ofdishonour and the date of the promissory note.
1 ••—A370G9 (78/10)
DEBERAGODA, J. – Per era v. Peiria
Learned Counsel for the plaintiff-appellant cites the judgmentof Dalton, J. in. the case of Silva vs. Somawathie, 31 N.L.R. 120 at123 where following the South African case of Rex vs. Goedhalsand de Wet, 26 S.C., 545 he holds that where a promissory notewas given on an account stated, and not as security for a moneylending transaction, the provisions of the Money Lending Ordi-nance do not apply.
In the South African case, Maasdorp, J. (at page 549) saysthis : —
“ To change as indebtedness for work, and in respectof agency into a loan, a contract effecting a novation mustintervene. ”
And later on—
“ Now, the mere fact that a debtor has given his ownpromissory note to his creditor for the amount of the debtcertainly does not lead to the necessary inferance that theparties intended to substitute the note for the debt. Whatthey really intended was that the creditor should have aliquid proof of his debt, which he can negotiate, if he sees fit,and upon which he can sue the debtor at maturity and thatuntil maturity the creditor’s claim should be suspended, butupon the dishonour of the note, after maturity, the creditor’sclaim should revive in respect of the original debt. Thecircumstances here held as not necessarily proving novationare the only ones proved in the present case. Time was givento the debtoi-, interest was charged, and a promissory notedelivered. There being no novation constituting a loan, thebulk of the promissory note must' be taken to have been givennot for a loan, but for an indebtedness for work doneand moneys paid as agent. ”
Section 2 (1) of our Money Lending Ordinance (Chap. 80) re-fers to the “ money lent ” and “ security made or taken in respectof money lent ” and in subsection (4) says that the provisions ofthat section will apply to “ any transaction, which whatever itsform, may be substantially one of money-lending. ”
Having arrived at a finding that the transactions relating to thepost-dated cheques in this case are not money-lending transac-tions, the next question that arises is whether the promissorynote P2 is a novation or has been merely given as security forthe quasi-contractual obligation arising from the dishonour ofthe post-dated cheques. If it is a novation it will lose its charac-ter as a non-money lending transaction which it would have hadotherwise acquired from the post-dated cheques transactions, andmight be construed as a loan where money was “ borrowed andreceived ”, as set out in P2, in which event the defendants should
-UJi±lJiaiAUUIJA, J.—1 'erera v. 1 'etns
succeed. If, however, there is no novation, then P2 will be onlysecurity for the fulfilment of the quasi-contractual obligationarising from the post-dated cheque transactions, which are notloans, and P2 itself will be a non-money-lending transaction andthe plaintiff should succeed.
Now, what is a novation ? Introduction to Roman-Dutch Lawby Professor R. W. Lee, (5th Edition) at page 272 describes threekinds of novation, and I need consider only the first, namely, “ anagreement to extinguish an existing debt and to substitute anew debt in its place ” and “ the effect of a novation is to dis-charge the old liabilities with all their incidents such as interest,real and personal securities and to purge any previous mora. ”
Pothier on Obligations (Evan’s Translation) Volume I, Part IIIChapter 2 at page 380 describes a novation of this type as “ asubstitution of a new debt for an old. The old debt is extinguishedby the new one contracted in its stead, for which reason, a nova-tion is included amongst the different modes in which obligationsare extinguished. ” He describes it as one in which “ a debtorcontracts a new engagement with his creditor, in considerationof being liberated from the former. ”
The promissory note P2 nowhere says that the 1st defendant’squasi-contractual obligation arising from the cheque transactionsis extinguished or that it was being entered into in considerationof being liberated from such obligations. Indeed, notwithstandingthe promissory note P2, it is open to the plaintiff still to sue the1st defendant on the quasi-contractual obligation arising fromthe cheque transactions. It is, therefore, clear that there is nonovation and that P2 is merely security given for the fulfilmentof that obligation and therefore acquires the non-money lendingcharacter of those transactions. It follows that P2 is not a moneylending transaction.
As a result of the conclusion I have arrived at that the pro-missory note P2 is not a money-lending transaction, issue 3 as towhether the plaintiff carried on the business of money-lendingand issue 4 based on it do not arise, although if that issue, too,arose for decision I would have been inclined to the view thatthe mere description by the plaintiff of himself as a person whotakes articles on pawn and lends money on interest, which maybe construed as one and the same transaction, and the generalevidence of his lending money out of the profits without speci-fic reference to the nature and number of transactions is notsufficient to establish system, repetition, and continuity, whichis required for the purpose of bringing this highly penal provi-sion into operation.
ISMAIL, 0 .—Percra v. Peirii
Accordingly, I set aside the judgment and decree in this caseand give judgment for the plaintiff as prayed for with costs bothhere and in the Court below.
Wanasundera, J.—I agree.
Ismail, J.
I have had the benefit of having read the judgment of mybrother Deheragoda, J. with whose views Wanasundera, J. hasagreed. I regret that my views on the matters in issue in thiscase and the conclusions which I have arrived are not in accordwith their findings. Re-capitulation of facts is not necessary asthe facts that are material are sufficiently clear from the judg-ment of my brother. The appellants in this case place great re-liance in support of their contentions that the promissory notein question did not represent a money lending transaction onthe judgment of Lord Devlin in Chow Yoong Hong vs. ChoongFah Rubber Manufactory (1961) 3 A.E.R. 1163.
It is necessary therefore to refer to the facts of that reportedcase in order to appreciate the principles enunciated in thatcase. The plaintiff and the defendants who carried on businessat Kuala Lumpur as a wholesale dealer in textiles and as amanufacturer of rubber shoes respectively, had out-stationcustomers from whom they received out-station cheques forgoods supplied. These cheques took from seven to ten days toclear, according to the station from which they came and couldnot be drawn on until they were cleared. The defendants, how-ever, had an arrangement with their bank whereby for aspecial charge they were allowed to draw on the credit oftheir out-station cheques at once. On February 17th, 1958, thedefendants then being in need of ready cash, the plaintiff gavethem a number of his out-station cheques totalling $6,964.33(which the defendant's were able to draw on immediately underthe arrangement with their bank subject to paying the specialcharge), the plaintiff receiving in exchange from the defendantstheir cheque for the same amount post-dat'ed to February 24th,1958. Seven similar transactions took place in February, 1958,and in each case the plaintiff in exchange for his out-stationcheques received a cheque from the defendants post-dated byabout a week. In March, 1958, a second group of transactionstook place between the parties, this time relating to the defen-dants out-station cheques which usually were post-dated. Againthe defendants needed immediate cash and in this second groupof transactions they arranged that the plaintiff should purchasetheir out-station cheques at a discount calculated at the rate of8 cents per $100 per day of the period between the date of thetransaction and the maturity of the out-station cheque. Where
ISMAIL, J.—Perera v. Peiris
the plaintiff was doubtful about the credit-worthiness of thedefendants out-station customer he required the-defendants togive as collateral security their own post-dated cheque maturingthe same day as the out-station cheque. In the course of thesecond group of transactions the defendants issued eight suchpost-dated cheques as collateral security. The sixteen post-dated cheques drawn by the defendants in favour of the plain-tiff in the course of the two groups of transactions, in Februaryand in March, 1958, were all dishonoured on presentation. In anaction by the plaintiff suing on the sixteen dishonoured cheque#the defendants contended that the contracts pursuant to whichthe cheques were issued were contract's for the repayment ofmoney lent by the plaintiff so as to fall within the MalayanMoney-lenders Ordinance, 1951, and that as the plaintiff was nota licensed money-lender and there was no written memorandumof the contracts the contracts were, under the Ordinance,unenforceable.
It was held that none of the transactions amounted to a con-tract for the repayment of money lent, and there was thereforeno defence to the plaintiff’s claim, since, with regard to thesecond group of transactions, their true nature was the purchaseof bills at a discount which business was quite distinct from•money-lending and the fact, as here, that the buyer was neithera bank nor a discount house did not alter the nature of thetransaction ; and with regard to the first group of transactions,there was nothing which could be represented as a lending ofmoney and the promise to repay it, though the plaintiff mayhave made a profit out of the transactions.
I have reproduced the facts in the reported case in order toillustrate the facts which determined the findings in that case.On the two groups of transactions in that case it will be seenthat when payments were made on the respective post-datedcheques discount was made at the rate of eight cents per $100per day for the period between the date of the transaction andthe date of the maturity of the out-station cheques. This wasthe only deduction that have been made in respect of thecheques which the plaintiff transacted in that business.
In this judgment commenting oh the distinction between adiscount and interest Lord Devlin at page 1167 states “Whenpayment is made before due date at a discount, the amount ofthe discount is no doubt often calculated by reference to theamount of interest which the paver calculates his money wouldhave earned if he had deferred payment to the due date.But that does not mean that discount is the same as interest. In-terest postulates the making of a loan and then it runs from day
ISMAIL, J.—Perera o. Peiris
to day until re-payment of the loan, its total depending on thelength of the* loan. Discount is a deduction from the price fixedonce and for all at the time of payment.” His Lordship there-after set out the principles he had enunciated in defining thedistinction between loan and interest in the following passage.“ It appears to their Lordships to be very improbable that if theplaintiff was truly a money-lender and there were truly loansfor which the post-dated cheques were only a form of security, hewould have been content that the rate of discount which heconsidered remunerative should apply only until the maturityof the cheques (never in any of the 16 cases longer than themonth) and thereafter, if the security proven valueless, to takeuntil re payment only such rate of interest as the courtawarded. ”
So that it will be seen from the conclusions of his Lordshipthat discount on cheques, which is completely distinct from in-terest, is a once and for all deduction from the capital sum fora fixed period and if the re-pavment had to take place after theperiod of the original discount whatever the length of time thatmight be, it is left to the courts to award any interest for thatextra period and it was not left to the lender to calculate at anyspecified rate of interest for that extra period.
The evidence in the instant case indicates, as is apparent fromthe plaintiff’s evidence, that the first defendant was in the habitof selling copra to dealers in Colombo for which he got chequesfrom those dealers and he used to bring those cheques whichwere invariably post-dated by about a month. Then he wouldgive those cheques to plaintiff who used to chai'ge him a com-mission of Rs. 10 per Rs. 1,000 per week. After calculating thecommission at this rate for the fixed period at which the chequeswould reach maturity he would deduct that amount and paythe balance on each cheque to the first defendant. This type ofdealings between the plaintiff and the first defendant went on forwell over one year. By June, 1965 the plaintiff had in his handa number of cheques which had been given by the first defen-dant and which have been dishonoured by the bank.
The accumulated amount due on all those cheques wasRs. 31,000 being apparently their face value. At the execution ofthe promissory note in question interest due on this Rs. 31,000from first June up to date of execution of promissory notewas according to the evidence Rs. 2,400. The note was thereafterdrawn up on the basis that the capital sum was Rs. 33,000, theplaintiff had apparently foregone Rs. 400 odd, and was madepayable on demand with interest at 18 per cent, per annum. Italso appears that the face value of Rs. 31,000 due on the chequesat the time the note was drawn up apparently did not represent
ISMAIL, J.—Perera v. Petris
the capital sums given by the plaintiff to the defendant on thepost-dated cheques, but the amount advanced on those cheques,which totals to Rs. 31,000, must necessarily have been the totalvalue of those cheques less what have been deducted as dis-count for a period of about one year prior to first June, 1965. Itwill therefore be seen that the capital sum advanced by theplaintiff on the cheques the total value of which was Rs. 31,000was in fact a sum less than Rs. 31,000. Apparently the promissorynote must have been drawn up on the basis that Rs. 31,000 wasa capital sum due one those cheques and adding on to it afurther Rs. 2,000 by way of accumulated interest. It is on thatbasis that the capital sum of Rs. 33,000 has been shown on thepromissory note which has been put' in suit.
In addition to the series of transactions that the plaintiff hadwith the first defendant for well over an year prior to first June,1965 the plaintiff admitted that certain profits he derived fromhis various businesses including a bakery, hotel, textile shop,pawn-broker’s establishment he used to invest those monieson taking articles which had been pawned and cashing ofcheques, and when he cashed cheques he charged what he des-cribed as a commission. In addition to cashing such post-datedcheques on commission he also admitted that he loaned moneyon two mortgages ; he further admitted that some people (osten-sibly persons other than the first plaintiff) used to leave chequeswith him as security. He used to lend money on them and if theyfailed to re-pay the money in time he used to get them to givehim other cheques with interest added to them. He also addedthat he had done business with the first defendant in this man-ner also for a number of years. He admitted that he did not keepany books of account either in respect of his transactions withthe first defendant or in respect of his transactions with thoseother people. It is therefore clear when one considers theplaintiff's evidence in this case that he has been carrying on abusiness of money-lending for a considerable length of time andhe had not maintained any books of account.
As I have already pointed out the sum of Rs. 33,000 which isindicated in the promissory note as the capital comprises of theface value of the several post-dated cheques given by the firstdefendant totalling to Rs. 31,000 and the balance Rs. 2,000 hasbeen added on to this Rs. 31,000 by way of interest. It is alsoobvious that the capital Rs. 31,000 face value of the post-datedcheques given by the first defendant since the evidence clearlyindicates that sums advanced on those cheques by the plaintiffto the first defendant were sums indicated on those cheques lessdeduction on the sums in those cheques calculated at a commis-sion of Rs. 10 per Rs. 1,000 per week, and sums advanced on
ISl&AXL, J.—Perera v. Petris
those cheques therefore had been after deducting those sums ascommission on .the respective cheques for a period of one monthin the first instance. Clearly therefore sums indicated asRs. 33,000 capital sum borrowed on the promissory note is afictitious amount. In addition the plaintiff has come into courtasking for interest on those sums at 18 per cent, per annum andthe accumulated interest on the promissory note exceeded theamount of the capital indicated therein and the plaintiff hasrestricted this claim to Rs. 66,000. These facts therefore show inno uncertain terms that the facts are completely different to thefacts in the case reported in (1961) 3 A.E.R. 1163.
Applying the principles enunciated in that reported case itappears to me fairly obvious that what the plaintiff hascharged in respect of each of the cheques was not a discount
e., a once and for all deduction on the cheques but a runningrate of interest depending upon the duration before payment ismade on each individual cheque. The plaintiff’s evidence as tohow he came to arrive at the figure of Rs. 33,000 capital on thepromissory note clearly demonstrates that he has never cashedthose cheques at a discount but had always charged interest ata fixed rate per week till the amount on the cheques was liqui-dated by the first defendant. It is therefore my view that theplaintiff had entered info money lending transactions withthe first defendant over a period of over an year during whichperiod he had carried on the business of money lending in res-pect of each of those cheques and had charged and recoveredinterest on cheques which had been paid off and has now comeinto court claiming interest on those cheques which had notbeen paid off calculating interest right up to the time the pro-missory note was executed.
This group of transactions with the first defendant coupledwith plaintiff’s admission that he used to lend money to otherpeople who used to leave cheques with him as security, and ifthey failed to re-pay the money advanced in time, he used toget them to give fresh cheques with interest added and hisadmission that he had carried on business in this manner withthe first defendant on 20 or 30 occasions, clearly indicates thatthe plaintiff had been carrying on the business of money lending.It is common ground that the plaintiff is not a registered moneylender and that he had not kept books of account reflecting thosetransactions.
I may add that in the reported case the plaintiff sued on thedishonoured cheques whereas in the present instance theplaintiff had not sued on those dishonoured cheques but had apromissory note executed for a sum representing the actual sumadvanced on those several cheques plus whatever sum he
ISMAIL, J.—Perera v. Peiris
deducted on each of those cheques when he paid cash at a dis-counted rate plus a further sum of Rs. 2,000 by way of addedinterest. Resulting position appears to be that neither the sum ofRs. 33,000, the capital sum on the promissory note, nor the sumof Rs. 31,000 which the plaintiff admits was the face value of thecheques but not the actual amount lent by him on those cheques,represents the actual sum paid by the plaintiff to the firstdefendant.
The case reported in 54 N. L. R. page 246 has several featuresin common with the facts of the present case. In that case thepromissory note in suit indicated that the capital sum borrowedwas Rs. 13,062.50. This figure was made up as follows : an advanceof Rs. 3,000 from the appellant personally to the respondentanother advance of Rs. 5,000 from the appellant personally tothe respondent, the balance Rs. 5,062.50 being commission payableon other sums advanced by the appellant or an independentcompany to the respondent. Considering the facts it was heldthat it was apparent that on the face orf it the note did not complywith the provisions of section 10 of the Money Lending Ordi-nance, in that the capital sum actually borrowed was inaccuratelystated.
Section 10 of the Money Lending Ordinance, Chapter 80, sub-section 1 reads : “ In every promissory note given as securityfor the loan of money after commencement of this Ordinance,there shall be separately and distinctly set forth upon thedocument—
The capital sum actually borrowed ;
(bj The amount of any sum deducted or paid at or aboutthe time of the loan as interest, premium, or chargespaid in advance ; and
The rate of interest per centum per annum payable inrespect of such loan.
Sub-section (2) : “Any promissory note not' complying withprovisions of this section shall not be enforceable.” The provisoto sub-section (2) indicates what relief can be given if defaultin compliance with this section was due to inadvertence and notto any intention to evade the provisions of this section. I shallrefer to this aspect of the matter shortly.
Dealing with the facts of that reported case Rose C. J., pro-ceeded to hold that the transactions in question were a pureand simple loan transaction and there was no account statedbetween the parties and that section 10 was applicable to thatcase and there had been a clear non-compliance with it. In thepresent case there is another factor which renders this notefictitious namely that the 2nd defendant, wife of the first defen-dant was no party to any of the transactions between the plaintiffand the first defendant. She had neither advanced nor receivedany monies from the plaintiff. Nevertheless she had been made
ISMAIL., J.—Perera v. Pa iris
a party to the promissory note in suit for no apparent reasonexcept that she was the wife of the first defendant and wasapparently possessed of property.
In the case reported in 28 N. L. R. page 339 a promissory notehad been given as security for future loans and contained afalse statement in regard to the capital sum actually borrowed.It was held such a note was not enforceable. Where such falsestatement was the result of a deliberate act and was not dueto inadvertence the court was not! empowered to grant reliefin terms of section 10 sub section (2) of the Money LendingOrdinance.
In the course of the judgment the Lyall Grant, J. held Itseems to me quite clear that the intention of the Legislature inenacting section 10 was to prevent a lender suing upon a notewhere the required particulars were falsely set out. Were itotherwise it would be easy for unscrupulous persons to avoid theeffect of the section.”
When one considers the facts in this case the plaintiff himselfadmitted in the course of his evidence that he did not enter allthese transactions because he wanted to evade Income Tax (videpage 51). This admission on the part of the plaintiff that he didnot enter these transactions in his Income Tax returns delibera-tely in order to avoid payment of Income Tax would clearly takeit out of the proviso t'o sub-section (2) of section 10 of theMoney Lending Ordinance and no relief would there be availablefor him under this proviso.
On summing up the evidence in this case there is no doubtno issue has been raised on the basis that the promissory notein question is a fictitious note within the meaning of section 10of the Money Lending Ordinance. Nevertheless the evidencein this case clearly demonstrates this fact. On the facts summa-rised by me it is apparent that the plaintiff has been carryingon the business of money lending as a side business of his andhe has systematically carried on this business of money lendingon the profits he had derived from his other business ventures.There is also ample evidence in this case including the admissionby the plaintiff I have referred to at page 51 that he did notenter these transactions in his books of accounts, in order toevade payment of Income Tax. This had been done deliberatelyby the plaintiff and was not therefore due to any inadvertenceor ignorance on his part. There is also nothing in his evidenceto show that he is a registered money lender within the meaningof the provisions of Chapter 80 of the New Legislative Enact-ments. I am therefore of the view that the learned District Judgehad correctly answered the issues 3 and 4 raised by the defendantin this case. I would accordingly dismiss this appeal with costs.
Appeal allowed.