Mulct I tar v. I email '
1962 Present: Basnayake, C.J., Herat, J., and Abeyesundere, J.
MUKTHAR, Appellant, ancl ISMAIL., Respondent8. C. 123—D. C. Kandy, 4S77/L
Fraudulent alienation—Circumstances in which a sale which is alleged to be infraud of creditors can be set aside—Combination of Paulian action and actionunder section 247 of the Civil Procedure Code—“ Creditor ”—“ Debt "—Claimfor unliquidated damages in a pending action is not a debt—Civil ProcedureCode 88. 244-247, G53.
In ft Paulian action which wUs combined with an action under section 247of the Civil Procedure Code—
Held, that it is only a creditor in esse who can claim that an alienation wanraado to his prejudice. A creditor is a person to whom a debt is owing byanother person. A debt exists when a certain sum of money is owing from onoperson (the debtor) to another (the creditor) in the form of a judgment dobtor a contract debt or, more specially, what is called in English law a specialtydebt.
A claim for unliquidated damages does not fall within the ambit of theexpression “ debt”. Accordingly, where, pending an action for unliquidateddamages, the defendant buys certain property and transfers it to a third party,the plaintiff, if judgment is subsequently • entered in his favour awarding acertain sum os damages, is not entitled to institute either a Paulian action or onaction under section 247 of the Civil Procedure Code against the defendant andtho person to whom the defendant transferred the property. If the .plaintiffin an action for unliquidated damages desires to prevent the dofenddnt fromalienating property pending tho action, he should seek tho safeguards providedby section G53 of the Civil Procedure Code.
Held further, that a sale by a debtor, oven where it is in fraud of creditors, isnot void but is liable to bo set aside at the instance of a creditor who has boonprejudiced by it and then only to tho extent to which ho has been prejudiced.In that sense a deed in fraud of creditors may bo declared null, but not nullond void. Unless and until it is sot aside by judicial decree tho salo is good.
2*—E 0117 (11/02)
BASNAYAKE, C. J.—MvUhar v. Ismail
.AlPPEAL from a judgment of the District Court, Kandy.
On 11th January 1955 the plaintiff instituted D. C. Kandy CaseNo. 440S against the 1st defendant for cancellation of two indentures oflease and for the recovery of damages. Decree was entered in his favouron 16th February 1956. When, in execution of the decree for damagesand costs, premises No. 101 were seized by the plaintifF, the 2nd defendantpreferred a claim to the premises and his claim was upheld. PremisesNo. 101 had been bought by the 1st defendant in February 1955 and beensold by him to the 2nd defendant by a Deed of Transfer No. 369 inOctober 1955, during the pendency of Case No. 4408.
In the present action, which was a combination of a Paulian action andan action under section 247 of the Civil Procedure Code, the DistrictJudge gave judgment for the plaintiff declaring that Deed No. 369 was nulland void and that the property affected thereby (premises No. 101)was liable to be seized and sold in execution of the writ issued in D. C.Kandy No. 4408. The 2nd defendant thereupon appealed.
II. W. Jayewardene, Q.C., with G. T. Sameraiuiclcreme, M. Jiafceh and
S. Wijeioardene, for 2nd Defendant-Appellant.
II. V. Per era, Q.C., with Vernon Jonklaas and M. T. M. Sivardecn,for Plaintiff-Respondent.
Cur. adv. vult.
October 10, 1962. Basnayake, C.J.—
In this action the plaintiff seeks to obtain a decree declaring that the
Deed No. 369 dated 1st October 1955 attested by T. M. A. Sally, Notary
Public of Matale. is null and void, and that the premises described
in the schedule to the plaint are liable to be seized and sold under writ
m D. C. Kandy Case No. L. 4408.
' 'Shortly the material facts are as follows : On 11th January 1955 theplaintiff instituted D. C. Kandy Case No. L. 4408 against the 1st defendantfor a cancellation of two indentures of lease bearing numbers 719 and7435, for his ejectment from the land called Benveula Estate of 40 acres1 rood and 10 perches situated in Matale, and for the recovery of damages.He obtained judgment in his favour, and on 16th February 1956 thefollowing decree was entered :—
“ It is ordered and decreed that the Indenture of lease No. 7435
dated 1st February, 1954 be and the same is hereby declared cancelled.
It is further ordered and decreed that the defendant be ejected fromthe said land and premises and the plaintiff be put placed and quietedin possession thereof.
It is further ordered and decreed that the defendant do pay to theplaintiff damages Rs. 5,500/- up to January 1955 and further damagesat Rs. 200/- per mensem till possession is yielded.
BASNAYAKE, C.T.—Muklharv. Ismail
It is further ordered and decreed that the defendant do pay plaintiffRs. 300/— per mensem from 1st February, 1954 till 16tb February, 1956.
And it is further ordered and decreed that the defendant do pay tothe plaintiff Rs. 20/- a month from 2nd June, 1954 till 16tb February,1956.
And it is further ordered and decreed that the defendant do pay tothe plaintiff his costs of this action as taxed by the officer of this court. 53
In execution of the decree, premises bearing 101 Trincomalee Street,Matale, were seized on 22nd May 1956. The 2nd defendant preferred a •claim to the premises seized, and on 26tb July 1956 bis claim was upheld.Ho based his claim on the Deed of Transfer No. 369 executed by the 1stdefendant on 1st October 1955 of the premises which the 1st defendanthimself bad purchased on 1st February 1955 after the institution of theplaintiff’s action on the lease.
At the trial it was admitted—
(а)that Deed No. 369 was executed on 1st October 1955,
(б)that the plaintiff had seized the premises affected thereby in
:execution of a decree in his favour in D. C. Handy Case
No. L. 4408,
that the 2nd defendant had claimed the land and the claim was
upheld on 26th July 1956,
that the 1st defendant is the judgment-debtor in D.C. Kandy L.4408,
that the amount of the decree in D.C. Kandy L.4408was Rs. 16,000/-.
The matters on which the parties were at variance were stated in the formof the following issues :•—•
“ (1) Was the said Deed No. 369 executed by the 1st defendant withthe object of defrauding the plaintiff ?
By the execution of the said deed, has the 1st defendant left
himself without sufficient property to satisfy the plaintiff’sdecree ?
Did the defendants act collusively in the execution of the said' deed?”
All these issues were answered against the defendant and judgmentwas accordingly given for the plaintiff declaring Deed No. 369 nullJand void and the property affected thereby liable to be seized and sold'in 'execution of the writ in D. C. Kandy Case No. L. 4408. The presentappeal is from that judgment.
The instant case is a combination of a Paulian action and an action
under section 247 of the Civil Procedure Code. What is a Paulian
action ? Planiol, Vol. 2 Pt. I p. 179, (Louisiana State Law Institute
Translation) defines it thus :
“ This action which is referred to as the ‘Paulian’ or * revocatoryaction ’ can be defined : as an action given to creditors to obtain the. revocation of acts done by their debtor in fraud of their rights, ”
BASNA YAKB, C.J.—Mukthar v. Ismail
The action is a creation of the Praetorian Law and is named afterthe praetor Paulus who introduced it. The word “ revocatory ” in thedefinition is also of Roman origin and owes its origin to the word“ revocare ” used by the Roman Jurisconsults in connection with thePaulian action in the phrase “per quam quae infrandem creditorumalienata sunt revocantur” (Digest Bk. XXII Tit. I s. 4). The fraud inthe case of a Paulian action consists in the debtor’s intention to puthis assets beyond the reach of his creditors. An action under section247 is a statutory remedy provided by the Civil Procedure Code incases in which the circumstances prescribed in that section exist. Thesection reads—
“ The party against whom an order under section 244, 245, or 246 ispassed may institute an action within fourteen days from the dateof such order to establish the right which he claims to the propertyin dispute, or to have the said property declared liable to be sold inexecution of the decree in his favour ; subject to the result of suchaction, if any, the order shall be conclusive. ”
To understand the scope of the action under section 247 it is necessaryto see what the orders referred to in the section are. The Court isempowered—
under section 244 to make an order releasing the propertywholly or partly from seizure,
under section 245 to make an order disallowing the claim, and
under section 246 to make an order continuing the sequestra-tion or seizure subject to an existing mortgage or lien.
An action under section 247 cannot be brought unless an order undersection 244, 245, or 246 is made.- Such an action can only be broughtby the party against whom an order under any of those sections hasbeen made and must be instituted within 14 days of the order. Theobject of an action under section 247 is either to establish the rightwhich the plaintiff claims to the property in dispute or to have theproperty declared liable to be sold in execution of the decree in his favour.The 247 action is available only to a decree-holder while a creditor whois not a decree-holder may bring a Paulian action. Section 247 doesnot empower the Court to revoke a sale by the judgment-debtor whilethe Paulian action does. The reliefs sought by the plaintiff in theinstant case are—
(а)that the deed by which the 1st defendant transferred the landin question be declared null and void, and
(б)that the property be declared liable to be seized and sold under■writ issued in D. C. Kandy Case No. L. 440S.
The learned District Judge has granted a decree in terms of the prayerand declared the deed null and void. A sale by a debtor even whereit is in fraud of creditors is not void, but is liable to be set aside or annulled
BASNAYAKJG, C.J.—Mukthar o. Iamail
at the instance of a creditor who has been prejudiced by it and thenonly to the extent to which he has been prejudiced. In that sense adeed in. fraud of creditors may be declared null, but not null and void.Unless and until it is set aside by the judicial decree the sale is good,and where the purchaser from the debtor sells the property the creditorscannot reach it in the hands of third persons. Planiol explains thematter thus ;
**, But the nullity which results from the Paulian action is not anullity like the others ; the fraudulent act is only annulled in theinterest of the defrauded creditor and remains effective with all itsjconsequences with regard to all other persons ; thus it is more proper,•in referring to it, to use the expression “revocatory action “/whichindicates its special nature.
1 In thus acquiring an effect which approaches that of actions innullity the revocatory action has preserved the fundamental characterwhich it has always had in accordance with the principle of its institu-tion ; it has not ceased to be an action for an indemnity arising froman illicit act; it always teDds to repair the damage suffered by thecreditor and belongs to the group of delictual actions. The nullitywhich is its consequence is the most direct and simple means ofassuring to the creditor the reparation to which he has a right. ”
The learned Judge was therefore wrong in declaring that the deedwas null and void. Now what are the circumstances in which a sale• which is alleged to be in fraud of creditors can be set aside ? They arestated thus by Domat who discusses the subject with greater claritythlan iVoet—
i t. ,
V 1635. * The alienations of movables and immovables whichdebtors make, upon another score than that of liberality, to personswho purchase with an honest intention, and for a valuable consideration,knowing nothing of the prejudice done thereby to creditors, cannotbe]revoked, whatever intention of defrauding the debtor may havehad. Bor the debtor’s knavish intention ought not to cause a loss tothose who deal with him in a lawful commerce, and who have noshare in his fraud.
Although the fraudulent alienation be made for a valuable| consideration, such as a sale, yet if it be proved that the purchaser! has been a ‘partaker in the fraud, that he might profit by it, gettingi the thing upon that account at a cheaper rate, the alienation will berevoked, without any restitution of the price to the purchaser whois an accomplice in the fraud, unless the money which he paid for itbe still in being, in the hands of the debtor who sold the thing to him.
To oblige him who purchases a thing of a debtor to makerestitution of it, it is not enough that the purchaser knew that thesaid debtor had creditors ; but he must have been privy to the designof defrauding them. For many of those who have creditors are notinsolvent, and one does not become an accomplice in the fraud exceptby taking part in it. ”
BASNAYAKE, C.J.—Muklhar v. Ismail
Yoet’s comment is in Book XLII Tit. S section 2 (Gane’s translationVol. 6 p. 408).. He states—
“ Nay it only arises from some disgraceful act, to wit the fraud notonly of the alienator, but more especially of the person to whomalienation has been made, inasmuch as, to make it possible for aplace to be found for this action, the alienation must have been madeby the debtor in fraud of creditors with the knowledge of suchperson”
Now turning to the facts of this case with the above propositions oflaw before me it would appear that the 2nd defendant who carriedon business at the premises in question had been in occupationof those premises as tenant since 1935. He became the tenant of the1st defendant in February 1955 when the latter purchased the premisesfrom Mrs. Croos for Rs. 17,500/-, and on 1st October 1955 the 2nddefendant purchased them himself from the 1st defendant for a sumof Rs. 17,500/- subject to two mortgage bonds Nos. 1G2S and 1G29 dated1st February 1955. The latter was a bond for Rs. 5,000/- carryinginterest at 1S% per annum. Judgment was obtained on that bondand decree was entered on 26th December 1955 for a sum of Rs. 5,225/—.The former was a bond for Rs. 3,000/-. These debts the 2nd defendantpaid. At the time the 2nd defendant purchased the premises therewas in force a caveat which had been presented by the plaintiff on 20thApril 1955. The notary who gave evidence said that he informed the2nd defendant that a caveat had been registered ; but he not only paidno heed to it, but also authorised the notary to execute the deed withoutexamining the relevant land registers. But whatever may be theconsequences of the 2nd defendant’s action in purchasing the land despitethe caveat the question is whether the 1st defendant’s alienation Hvasin fraud of creditors. Judgment had not been entered in the actionagainst the 1st defendant at the time of the alienation. That wasdone only in January 195G. There is no evidence that the 1st defendantwas in debt, except that there were two mortgages on this very land,a primary and a secondary mortgage. The alienation did not affectthe mortgage creditors. There is no evidence that other creditors, ifany, were affected by it.
The question that arises for decision is whether the plaintiff was acreditor at the date of the alienation of his property by the 1st defendant.For it is only a creditor in esse that can claim that an alienation wasmade to his prejudice, (Planiol, Vol. 2 Pt. 1 p. 1S6). To answer thatquestion it is necessary to decide who is a creditor. Sweet’s LawDictionary defines the expression thus :
Creditor is a person to whom a debt is owing by another personcalled the debtor. The creditor is called a simple contract creditor,a specialty creditor, a bond creditor, or a judgment creditor, accordingto the nature of the obligation giving rise to the debt; and if he hasissued execution to enforce a judgment ho is called an executioncreditor. He may be a sole or joint creditor. ”
BASNAYAKE, C. J.—Mukthar v. Ismail
A creditor being a person to whom a debt is owing by another personthe; next question that arises for decision is— What is a debt ? Tothat question too Sweet’s Law Dictionary provides an answer. Itstates——r.|
' “ In the strict sense of the word a debt exists when a certain sum ofmoney is owing from one person (the debtor) to another (the creditor).1Hence ‘debt’ is properly opposed (1) to unliquidated damages, (2) to*
* liability ’ when used in the sense of an inchoate or contingent debt;and (3) to certain obligations not enforceable by ordinary process.
‘ Debt * denotes not only the obligation of the debtor to pay, but alsothe right of the creditor to receive and enforce payment.
Debts are of various kinds, according to then- origin. ”
The author next goes on to describe the different kinds of debts suchas, statutory debts, specialty debts, simple contract debts, debts arisingfrom privity of estate, crown debts, secured debts, petitioning creditor’sdebt, debt provable in bankruptcy, and preferential debts.
With these definitions in mind I shall now address myself to the factsof the instant case to determine the nature of the debt, if any, owed bythe 1st defendant to the plaintiff at the date of the transfer. It wouldappear from the plaint that there was a contract of lease between theplaintiff and the 1st defendant (Lease Bond No. 7435 dated 1st February1954) and that the plaintiff had sued the 1st defendant for damages forbreach of the terms of that contract. As the plaintiff had not obtainedjudgment at the time of the transfer on 1st October 1955, there was nojudgment debt in existence, nor was there a contract debt or morespecially what is called in English law a specialty debt as no rent ormoney payable on the lease bond was claimed. The claim made in theaction on the contract of lease was for unliquidated damages.
A claim for unliquidated damages does not fall within the ambit ofthe expression “ debt ”. As there was no debt due from the 1st defendantthe plaintiff was not a creditor of the 1st defendant at that date and thetransfer cannot be said to .be in fraud of him.
In the instant case the 1st defendant became the plaintiff’s lesseeon 1st February 1954. Action for cancellation of the lease, damagesand ejectment was instituted on 11th January 1955. The 1st defendantpurchased the premises in question on 1st February 1955 and on 3rdOctober 1955 sold it to the 2nd defendant. It was not till 16th February1956 that decree was entered in favour of the plaintiff. He can have nogrievance because when the lease was executed the 1st defendant-was notthe owner of the land, nor was he the owner of the land when the actionwas instituted. So that it is not open to him to say that to his detrimentth!e defendant got rid of property which at the time of institution ofhis action he reasonably expected would be available to him for executionof; his judgment debt in the event of his succeeding in the.action. The1st defendant purchased it after the action was instituted and sold
BASNAYAKE, C.J.—Mukthar v. Ismail
it before judgment. The Paulian remedy does not lie in such a caseand no relief under section 247 can be claimed. It may be asked whatsafeguards does our law provide against the alienation of his propertyby the defendant to an action in order to prevent the plaintiff fromexecuting his writ in the event of his obtaining judgment. They areto be found in our statute law. Section 653 of the Civil ProcedureCode provides—
“ If a plaintiff in any action, either at the commencement thereofor at any subsequent period before judgment, shall, by way of motionon petition supported by his own affidavit and viva voce examination(if the Judge should consider such examination necessary) satisfythe Judge that he has a sufficient cause of action against the defendant,either in respect of a money claim of or exceeding two hundred rupeesor because he has sustained damage to that amount, and that he has■no adequate security to meet the same, and that he does verily believethat the defendant is fraudulently alienating his property to avoidpayment of the said debt or damage ; and if he shall at the same timefurther establish to the satisfaction of the Judge by affidavit or (if theJudge should so require) by viva voce testimony such facts that theJudge infers from them that the defendant is fraudulently alienating hisproperty with intent to avoid payment of the said debt or damage,or that he has with such intent quitted the Island leaving thereinproperty belonging to him, such Judge may order a mandate (formNo. 104, First Schedule) to issue to the Fiscal, directing him to seizeand sequester the houses, lands, goods, money, securities for moneyand debts, wheresoever or in whose custody soever the same may bewithin his district, to such value as the court shall think reasonableand adequate and shall specify in the mandate, and to^ detain or securethe same to abide the further orders of the court. ”
In the instant case if the plaintiff wished to safeguard himself heshould have sought the protection offered by the above cited section.Not having invoked section 653 he cannot complain afterwards andresort to the Paulian action for the purpose of obtaining the reliefafforded by section 653.
There remains for consideration only the question of the effect of thepurchase of a land in respect of which there has been entered in theappropriate land register a caveat. Provision for the registration of acaveat is made in section 32 of the Registration of Documents Ordinance.which reads—
“ (1) Any person (in this -Ordinance called a ‘ caveator ’) maypresent for registration a caveat in the prescribed form requiring to beserved with notice of the presentation for registration of any instrumentaffecting the land described in. the caveat.
The Registrar shall on receiving a caveat register it in the same■manner as other instruments, but shall retain the caveat.
Hendrick v. Perera
A caveat shall he in force for such period as may be specifiedtherein, not being longer than the period covered by the fee paid on thecaveat.
The notice to be given to the caveator shall be in the prescribedform and shall be sent by registered letter to the address mentioned in
t 1 •
'(5) If, while a caveat is in force, an instrument affecting the land
described in the caveat is presented for registration, and in an action• commenced by the caveator in a competent court within thirty daysfrom posting of the notice required by subsection (4) it is proved to thesatisfaction of the court that the instrument presented for registrationis' or was at the time of registration void or voidable by the caveatoror fraudulent as against him or in derogation of his lawful rights, thecourt may order the instrument to be rectified or cancelled as may benecessary to preserve the rights of the caveator, and may order thenecessary correction to be made in the register.
(6) Nothing in this section shall affect any other power which maybe possessed by any court of ordering any instrument to be rectifiedor cancelled. ”
As the alienation is not void or voidable by the caveator, and as therehas been no fraudulent alienation, and as the alienation is not in derogationof the lawful rights of the caveator, no action under section 32 (5) can betaken. The judgment of the learned District Judge is therefore reversedand the plaintiff’s action dismissed with costs.
The appellant is entitled to the costs of appeal.
Herat, J.—I agree.
Abeyestjndere, J.—I agree.