SivaJcumaran v. Rajasegatam
P-K the Privy Council]
1962 Present: Lord Tucker, Lord Hodson, and Mr. L. M. D. de SilvaR- Si V AK.UMARAN (Exeeutor of the Estate of V. Rajaratnam deceased)
and V. RAJASEGARAM, Respondent
Privy Council Appeal No. 49 of 1960S. C. 515—D. C. Point Pedro, 4,323JM
Partnership—Action baaed on co-oumerahip—Right of defendant to plead de factopartnership—Capital over Rs. 1,000—Absence of written agreement—Actionfor accounting—Maintainability—Partner a' shares in business—Equality notessential—Prevention of Frauds Ordinance (Gap. 57) a. 18(c)—Trusts
Ordinance, as. 90, 96.
Where an action is instituted in respect of a business on the false basis thatthe plaintiff and defendant are co-owners of the business it is open to thedefendant to show that the business was carried on by the plaintiff and himselfin a de facto partnership and not as co-owners, that there was no agreement inwriting as required by section 18 (c) of the Prevention of Frauds Ordinance 1840and that consequently the action was not maintainable.
In a partnership business it is not essential that the partners’ shares in thebusiness should be equal.
A person, who had been carrying on a business, took in 1929 his two sons(the plaintiff and defendant) into the business giving each of them a one-thirdshare in it. An application for the registration of the business under theBusiness Names Registration Ordinance was made on the 6th March 1929, andthe date of the commencement of the business was given there as the 2nd March1929. The father died in 1933 leaving by will his one-third share in the businessto the plaintiff.
The plaintiff instituted the present action against the defendant for a declara-tion that he, the plaintiff, was the owner of a two-third share of the assetsand goodwill of the business and for an order on the defendant for an account-ing of all the assets and of the profits of the business from the 31st December1960. The claim was made on the basis of a co-ownership.
Held, that the evidence led in the case established that the business was ade facto partnership and not a co-ownership, although the shares of the plaintiffand defendant were unequal in the proportion of two-thirds and one-thirdrespectively. The rights of the plaintiff and defendant in the business, derivedthough they were from the father, were the result of the creation of the defacto partnership and not something independent of it. In the circumstances,since there was no agreement in writing as required by section 18 (c) of thePrevention of Frauds Ordinance, the present action was not maintainable.
Held further, that , in such a case, the plaintiff was not entitled to claim that,under section 96 of the Trusts Ordinance, the defendant must be held to be atrustee for the plaintiff.
MB. L. M. D. DE SILVA—Sivakumaran v. Rajasegaram
j^PPEAL from a judgment of the Supreme Court reported in(1958) 61 N. L. R. 337.
E. F. N. Oratiaen, Q C., with Walter Jayawardena, for the plaintiff-appellant.
Dingle Foot, Q.C., with D. J. Tampoe, for the defendant-respondent.
Cur. adv. vult.
February 20, 1962. [Delivered by Mb. L. M. D. de Silva]—
The plaintiff (appellant on this appeal) instituted this action in theDistrict Court of Point Pedro against the defendant (respondent on thisappeal) who was his brother for a declaration that he, the plaintiff, wasthe owner of a two-third share of the assets and goodwill of a businesscarried on at Jaffna under the name of S. Veeragathipillai & Sons andfor an order on the defendant for an accounting of all the assets takencharge of by the defendant and of the profits of the business from the31st December 1950. He filed with the plaint a balance sheet of thebusiness made up to 31.12.50 audited and certified by duly appointedauditors. He complained that no accounts had been rendered sincethat date. He further complained that the defendant had taken posses-sion of the business denying the rights of the plaintiff thereto since the7th June 1952 and was making use of the said business as propertybelonging solely to him. The claim was made on the basis of co-ownership, yThe defendant denied the co-ownership. He pleaded that the businesshad been carried on by the plaintiff and himself in partnership, thatthere was no agreement in writing as required by section 18 of the Pre-vention of Frauds Ordinance 1840 and that consequently the action wasnot maintainable. He also raised certain other defences involvingquestions of fact which were rejected by the learned trial judge. Withregard to these no questions arise on this appeal.
With regard to the question of partnership the learned trial judgeheld that “ though an agreement for a partnership may be inferred thefacts of this case taken together do not shut out the existence of a co-ownership ”. He held that the plaintiff was entitled to the relief heclaimed and entered decree in his favour. On appeal the Supreme Courtheld that“ no conclusion other than that the business is a partnershipis reasonably possible ”, set aside the learned trial judge’s judgment,and dismissed the action.
It is convenient at this stage for their Lordships to" examine the provi-sions of section 18 of the Prevention of Frauds Ordinance (Chapter 57Ceylon Legislative Enactments) which is as follows :—
“18. Ho promise, contract, bargain, or agreement, unless it be inwriting and signed by the party making the same, or by some person
2*R 2668 (5/62)
MR. L. M. D. DE SELVA—Sivakwnaran v. Jtajasegaram
thereto lawfully authorised, by him or her, shall be of force or avail inlaw for any of the following purposes :—
(c) for establishing a partnership where the capital exceeds one
thousand rupees :
Provided that this shall not be construed to prevent third partiesfrom suing partners, or persons acting as such, and offering in evidencecircumstances to prove a partnership existing between such persons, orto exclude parol testimony concerning transactions by or the settlementof any account between partners. ”
Subsections (a) and (6) have no bearing upon this case. On the argumenton this appeal a business with a capital of over one thousand rupees,oarried on without an agreement in writing but with the other elementsnecessary to constitute a partnership was called a de facto partnership.This term will be used in this judgment to convey the same meaning.
It was held by the Board in 1951 in the case of Pate v. Pate1and has been settled law since that an action by a partner of a defacto partnership brought against another in possession of the businessfor an accounting could not be maintained as the plaintiff’s rights as apartner could not be established in the absence of a writing. The judg-ment of the Board also contains the following observations.
With regard to the law relating to partnership it observed at p. 290“ Ordinance No. 22 of 1866 enacted that English law is the law of partner-ship in Ceylon, but this in no way enlarged or diminished the priorOrdinance No. 7 of 1840. ”
Referring to the fact that in particular cases the application of theOrdinance may result in hardship it said at p. 293
“ Whenever the law enacts that the truth shall be proved by one form oftestimony only, and not by all admissible and available forms, there isperil of doing particular injustice for the sake of some general good, andeven of enabling some rogue to cloak his fraud by taking advantageof a statutory prescription the policy of which was the prevention offraud. This the Legislature must be taken to have weighed beforeenacting the Ordinance. ”
Various allegations of reprehensible conduct have been made by theparties against each other. Their Lordships have not considered them tothe extent necessary for deciding upon their truth or falsity. As willpresently appear, upon the views they have formed, the truth or falsityof these allegations would not affect the result of the case.
Later cases decided by the Supreme Court of Ceylon laid down theprinciple that a de facto partnership could be alleged and proved to defeaton the facts an action brought by one partner of a de facto partnershipagainst another on a false basis of fact asserted to avoid the necessity forbasing the claim on partnership such latter claim being bound to fail for
1 (1915) 18 N. L. It. 289.
MR. JL. M. D. DE SELVA—Stvakumaran v. Rajaaegaram
lack of a writing. There is no reason why such a course should not be per-mitted because although the agreement behind a de facto partnership isof no force or avail in law to establish a partnership there is nothing whichmakes the facts involved in it inadmissible in evidence for the purpose ofdestroying an allegation of a false set of facts upon which a claim on afalse basis is sought to be made. In Balasitbramaniam v. ValliapparChettiar1 the plaintiff, the executor of the will of one Muttiah, foundedhis claim against the defendant on an allegation that the defendant hadbeen the agent of Muttiah. The defendant denied the allegation ofagency and sought to sustain his plea by proving by parol evidence thatthe true relationship was that of de facto partnership. This he wasallowed to do. Keuneman J. said at p. 558
“ The plaintiff alleges that there was a gratuitous agency on the partof defendant in relationship to Pillai. The defendant seeks to rebutthat allegation, and to prove that the relationship between these personswas one of partnership, but that in consequence of the absence of anywritten agreement, that relationship was of no force or avail at law,and that the plaintiff cannot maintain this action.”
He held that the defendant was entitled to lead such evidence remarking
“If a defendant in this position were not allowed to give suchevidence, a ready means would be available for a dishonest plaintiffso to frame his action as to escape the effect of section 21 ” (nowsection 18).
Their Lordships will now consider the material upon which the SupremeCourt came to the conclusion that the business was a de facto partnershipand not a co-ownership.
The plaintiff and the defendant are the sons of one Veeragathipillai whocarried on business at Jaffna and Point Pedro as a trader in a number ofcommodities among which were rice, paddy, tiles and timber and also as amoney-lender and pawn broker. In 1929 he took the plaintiff and defendantinto the business giving each of them a one-third share in it. An applicationfor the registration of the business under the Business Names RegistrationOrdinance (Chapter 120 Ceylon Legislative Enactments) was made on the6th March 1929 the date of the commencement of the business being theregiven as the 2nd March 1929. The business which commenced on thatdate was no doubt the business of the father and the two sons becauseVeeragathipillai’s business run by himself alone had commenced manyyears before 1929. In the application in the cage headed “ The presentname in full of every individual who is partner in the firm ” the names ofVeeragathipillai, the plaintiff and the defendant have been entered.
Attached to the plaint and pleaded as part of it there is, as stated in theopening paragraph above, a financial statement audited and certified byduly appointed auditors. In this statement under the heading “ Profit
1 (1938) 39 N. L. R. 553.
MR. L. M. D. DE SELVA—Sivakumaran v. Rajasegaram
and Loss Appropriation Account ** appears an item “ Transfer to partnerscurrent account ” in which money is appropriated to the plaintiff and thedefendant. Commenting on this statement and on similar statementsfor 1946, 1947, 1948 and 1949 the Supreme Court states correctly “ allthese statements have been prepared on the basis that the business is apartnership * Partnership * here and in several places in the judgmentof the Supreme Court is used in the sense of a de facto partnership.
Mr. Kmn araswamy, a chartered accountant, stated in evidence that theaccounts had been kept on the basis of a partnership. Mr. Kumaraswamyhad been in close touch with the accounts. His evidence was not rejectedand there is no reason to distrust what he said. TTls evidence covers theperiod after the death of the father referred to immediately.
Veeragathipillai died on the 3rd December 1933 leaving , a last willdated 14th October 1933. By that will he left his one-third share inthe business to the plaintifF making provision for such claims as his wifehad on it under the law of Tesawalamai applicable to the parties. Thoseprovisions have been complied with and plaintifF without doubt becameentitled to his father’s one-third share. The plaintifF says that thebusiness was conducted after the father’s death in exactly the same wayand was of the same nature as in the father’s lifetime except that theplaintifF was regarded as entitled to a two-thirds share in place of theoriginal one-third. It is not disputed that till 1952 the business wasso carried on. It is to be inferred that on the death of the father therewas immediate agreement between the plaintifF and the defendant tocarry on the business on exactly the same basis as it had been carried onduring the father’s lifetime. In 1952 disputes between the plaintifFand defendant came to a head. In view of the decision which theirLordships have arrived at on the question of partnership those disputesare not relevant to the result of the case.
On the 14th October 1933 (the day of the execution of the will) Veeraga-thipillai, plaintifF and defendant executed a solemn document, presumablyto place on record their respective positions with regard to the business,which was produced in evidence by the plaintifF in the father’s Testa-mentary Case Jaffna No. 58. The following is the relevant portion ofthe translation put in in that case :—
“ Know all men by these presents that we, Sinnathamby Veeraga-thipillai and sons, Veeragathipillai Rajaratnam and VeeragathipillaiRajasegaram, all of Thondamannar, declare as follows :—
Whereas we are carrying on business in partnership under the name,firm and style of ** Veeragathipillai & Sons ” in paddy, rice, tiles,teakwood (timber) and tobacco and various other goods and alsopawn-broking, and whereas we have registered the said business on8th day of March 1929, under No. in the Vilasam of “ S.V.” and
MR. L. M. D. DE 8I3/VA—Sivahumartm v. H&jastgaram
whereas we the three persons are entitled to equal shares in the saidBusiness and whereas it appears to us that it is necessary that we shouldmake a declaration of the same:
Know all men by these presents that we the said SinnathambyVeeragathipillai, Veeragathipillai Rajaratnam and VeeragathipillaiRaj asegara m, declare that we the three persons have equal shares inthe partnership business carried on by ns under name, firm and styleof “ S.V.*’ and “ S. Veeragathipillai & Sons **.
It was attested by a notary public who stated in his attestation :—
“ I, Sinnathamby Subramaniam, Notary Public, Jaffna, do herebycertify and attest that the foregoing Instrument was read over andexplained by me.”
The same document was put in evidence in the present case by theplaintiff with a translation which has substituted for the word * partnership'the words ‘ joint business It has to be remembered that in theearlier case (the testamentary case) the present dispute had not arisen.
Several cheques were produced signed by the plaintiff as * partner Aplaint was produced in an action brought by the plaintiff and defendant inwhich they described themselves as partners. After an examination ofthe documents mentioned above and several other documents in whichthe plaintiff and defendant described themselves as partners the learnedDistrict Judge came to the conclusion that “ The inference to be drawnfrom all these documents in which they have described themselves aspartners would be that this business appears to have been carried on onthe basis of a partnership. But the matter does not stop there. Onehas to probe further and consider the other documents and evidenceplaced in this case to determine whether in fact there was only a partner-ship that had come into existence or whether the facts could also beconsistent with eo-ownership.” The Supreme Court after examiningthe same documents and the other evidence said that the only possibleconclusion was that the business was a partnership (meaning a de factopartnership). Their Lordships agree with the view of the SupremeCourt. Whatever the extent may be in which the “ facts could also beconsistent with co-ownership ” they demonstrate that the plaintiff anddefendant regarded themselves as partners and avowedly conductedbusiness on that basis.
An examination of the evidence given by the plaintiff in DistrictCourt Case Jaffna 58 Testamentary and the circumstances in which itwas given throws considerable light oh the matter how under considera-tion. The case related to estate duty payable on the father’s estate.The evidence was given in 1937 before the questions now in disputebetween the plaintiff and the defendant had arisen. The plaintiff said—
“ This business was registered as partnership business in 1929.
MR. L. M. D. DE SILVA—Sivakumaran v. Rajasegaram
Before it was registered there was a verbal agreement between myfather and myself and my brother with regard to this business. Myfather said that as we have already joined in the business we would begiven equal shares in the business with him. In 1929 there was anagreement that this business should be carried on in partnership—1 /3rdshare each. My father applied for registration of the business.”
He was confronted with this evidence in the present action and his answerran thus
“ Q. Hid you say “ in 1929 there was an agreement that thisbusiness should be carried on in partnership ” ?
A. I gave evidence in Tamil as “ Pangkali ”. I do not know howit was interpreted. My lawyers knew the English language. Mr. C.Cumaraswamy was the District Judge and Mr. 1ST. Nadarajah was thecounsel who appeared for me in the Testamentary case.”
Mr. Cumaraswamy and Mr. Nadarajah are both Tamil gentlemen and itwas so stated to their Lordships by counsel on this appeal. There couldnot have been a blatant mistake on the part of the interpreter because itwould have been noticed at once by the Court. There has, in fact, beenno complaint that the interpreter has made a mistake in his translation.The case for the plaintiff put at its highest could only be that he used aword capable of being translated into English either as ‘ partner * or‘ co-owner ’, that he meant to convey the meaning of ‘ co-owner * andthat it has been translated as * partner ’. In support of this position itis pointed out that the trial judge has held that the plaintiff “ neverappreciated the difference between a partnership and a co-ownershipand the legal consequences that flowed directly from them”. But theplaintiff was not the only person to whom responsibility for the word£ partner ’ in the evidence as translated and recorded is to be attributed.He was advised and represented in Court by lawyers in that case andif the plaintiff had meant to say co-owner and not partner they wouldhave known that fact. They would before taking any part in the proceed-ings have gone in detail into all the facts and, if such was the case, haveknown that the interpretation * partnership ’ though it could not hesaid to be wrong as a matter of language did not carry the connotationthat the plaintiff intended. They could have intervened to put the matterright but did not do so. This indicates that the plaintiff did intend tosay ‘ partnership ’ and nothing less or more.
It has no doubt to be remembered that in the testamentary case theissue between “ partnership ” and “ co-ownership ” had not arisen andplaintiff would have succeeded equally on the basis of “ partnership ”as on that of co-ownership. But it is not lightly to be presumed thatthe lawyers who appeared would not have seen to it that the evidence. recorded was accurate and precise ; in the background of the rest ofthe evidence in this case it does not appear that they failed to do so.
MJR. I*. M. D. DG SELVA—Sivakumaran v. R jjasegaram
The bequest to the plaintiff by the father by Last Will is made in thefollowing language :—
“ Out of the money and articles in the business carried on under thenames and style of “ S.V., S. Veeragathipillai & Sons **. One thirdshare belonging to the said Veeragathipillai and the whole of our lands,mortgage amounts, Promissory Note amounts, sailing vessels, andboats “ Nadai Vaththai ” and other movables should devolve on ourson Veeragathipillai Rajaratnam.”
It is argued that the language is inappropriate if-Veeragathipillai hadregarded himself as a partner. The language is also inappropriate ifVeeragathipillai had regarded himself as a co-owner because (as correctlystated by counsel for the appellant in another connection) a co-ownerwould own an undivided one third share of each article not a one-thirdshare “ out of the articles ”. A bequest by a co-owner could haveproperly taken the form “ my undivided one-third share ”. TheirLordships do not think any weight can be attached to the languageused. In any case even if some weight were to be attached their Lord-ships are of the view that the rest of the evidence completely outweighsthe point sought to be made.
The Supreme Court (Soertsz, J. with whom de Krester, J. agreed) heldin Case No. 58 Testamentary Jaffna referred to above (reported in39 N. L. R. 481) that in 1929 the father gifted a one-third share in thebusiness to each of his sons. It has been argued that the gift so madecreated a co-ownership. An examination of the judgment of the SupremeCourt in that case shows the argument to be erroneous.
The facts relevant to the present case arising from Case No. 58Testamentary Jaffna are the following. On the death of the fatherthe Commissioner of Stamps took up the position that the whole of thebusiness passed on the father’s death and sought to levy estate duty onthe value of the whole. The plaintiff (in the present case) resisted onthe ground that the father had divested himself of a two-thirds interestin 1929. In the words of Soertsz, J. at p. 484 :—
“ The appellants based their claim on the ground that from March1929 a partnership had subsisted between them and their father ;alternatively, on the ground that by virtue of what occurred in March1929 when the business was registered in the names of the three of themthere was at least a gift of a one-third of the father’s share to each ofthem and that they took bona fide possession and enjoyment of itimmediately and thenceforward retained it to the exclusion of thedonor.”
He rejected the first ground of partnership because there was no agree-ment in writing. He said of certain documents produced in the case” This Court held, if I may say so, quite rightly that documents suchas these prove that the parties were carrying on business in partnership
MR. L. M. D. DR SILVA—Sivakumaran v. Rajasegaram
and nothing more. They do not prove what section 21 (4) (now section18) requires namely that the agreement for carrying on the business inpartnership was in writing. Consequently the position that resultsfrom the evidence in the case is that there was a business conductedby these parties which cannot, however, be adduced to a court of lawas a partnership ‘ of force or avail * because a rule of evidence stands inthe way and prevents it from being so adduced He then turned tothe second ground. He said “There was the alternative claim thatwhen in March 1929 the deceased admitted his two sons into the businesson an equal footing with himself as evidenced by A4 (this is the declara-tion made shortly before death) there was in effect a gift of a third ofthe business to each of his sons and that that gift satisfied the conditionnecessary to ensure that their shares did not pass on death ”. Afterconsidering various arguments and authorities he upheld this argument.It will be seen that upon the view taken in that case the “ gift ” wasthe result of the creation of the de facto partnership. The inferencethat there was a donation resulting in a co-ownership cannot be drawnfrom what was held in that case.
The learned District Judge has held
“ In all the circumstances of this case I find that though an agree-ment for a partnership may be inferred the facts of this case takentogether do not shut out the existence of a co-ownership, the characterwhich this business assumed originally. In any event it is my opinionthat the vanishing point of co-ownership has not been established inthis case.”
Their Lordships do not think that the business ever assumed the characterof a co-ownership. They are of the view that the interests of the plaintiffand defendant in the business arose at the moment they were taken intothe business and constituted partners. The application for registration aspartners under the Business Names Registration Ordinance was made onthe 6th March 1929 and the date of commencement of the business appearsfrom the said application to have been the 2nd March 1929 immediatelybefore the application. There is nothing to warrant the view that there•were two separate acts one of donation and another of the creation of apartnership. There was in fact a donation because the father ceased tobe the absolute owner and the rights of the plaintiff and defendant aspartners were dependent on the voluntary parting with absolute ownershipby the father ; but those rights of the plaintiff and defendant in thebusiness, derived though they were from the father, were the result ofthe creation of the de facto partnership and not something independentof it.
An argument was addressed to their Lordships based on the RomanDutch Law of co-ownership that the parties once having been co-ownersnever became partners. What has been stated earlier disposes of this.argument because their Lordships are of the view that the parties werenever co-owners.
MR. L. M. D. DE SILVA—Sivakumaran v. Rajasegaram
The learned District Judge says “ even though it could be said in thiscase that all other conditions existed there certainly was no division of orsharing of profits in this case ”. This view would appear to be erroneous.Alagasunderam a witness called by the plaintiff whose evidence there is noreason to doubt said he “ had been working as a kanakapulle (accountsclerk) from the time of the late Veeragathipillai ” and went on to say** The business has been carried on as partners and profits have beenascertained from time to time and divided between the partners **. Ifthis correction is made in what the learned District Judge said his viewwould appear to be that all the conditions necessary for a de factopartnership existed.
The Supreme Court said :—
“ The principal reason that appears to have induced the trial Judgeto take the view that co-ownership could not be excluded in regard tothe business carried on after Veeragathipillai’s death is that the sharesof the plaintiff and the defendant in the business and the division ofthe profits between them were in the proportion of two-thirds and one-third respectively, and that the inequality of shares is inconsistentwith partnership.”
There is much force in the observation. The learned District Judge inmore than one place in his judgment indicates that he was influenced bythat view. At one point after referring to certain things said and doneby the defendant he says “ he cannot now be heard to say that the alloca-tion should have been on the basis of 50 : 50 which would be the caseif it was a partnership.”
Their Lordships will now examine an argument addressed to them thatthe defendant must be held to be a trustee for the plaintiff. The onlybasis on which the plaintiff made his claim was co-ownership and uponthat basis he pleaded in the plaint that the defendant had since the 7thJune 1952 taken possession of the business and that his possession of theplaintiff’s share must be held to be in trust for the plaintiff. No otherclaim on the basis of trust was made so that the claim as made fails onthe view that there was no co-ownership. On appeal no argument wasaddressed to the Supreme Court “ that if the business is a partnershipand not a co-ownership the plaintiff is entitled to any relief on the basisof a constructive trust by virtue of section 90 or 96 of the TrustsOrdinance ”. It was however urged before their Lordships that in anycase the defendant must be held under section 96 to be a trustee forthe plaintiff. Section 96 reads :—
“ In any case not coming within the scope of any of the precedingsections where there is no trust, but the person having possession ofproperty has not the whole beneficial interest therein, he must hold theproperty for the benefit of the persons having such interest, or theresidue thereof (as the case may be), to the extent necessary to satisfytheir just demands.”
Selladorai v. The Queen
Their Lordships would observe that before the plaintiff can make a “ justdemand ” recognised by law he must be in a position to establish thepartnership- This he is unable to do and consequently the argumentfails. If the argument prevailed it would mean that in most, if not all,cases a party to a de facto partnership could use the argument to escapefrom the disabilities imposed on him by section 18 of the FraudsOrdinance and thus reduce the section to one of no consequence. ‘ TheLegislature could never have intended such a result.
It appears from what has been said that their Lordships are of the viewthat the business was conducted on the basis of a de facto partnership.Any claim on the basis of partnership would fail and in fact has not beenmade. The claim on the basis of a co-ownership which has been mademust fail because no co-ownership existed. For these reasons theirLordships will humbly advise Her Majesty that the judgment of theSupreme Court be affirmed and the appeal dismissed. The appellantmust pay the costs of this appeal.
R. SIVAKUMARAN (Executor of the Estate of V. Rajaratnam deceased) and V. RAJASEG