SHARVANANDA C. J.. L.H. DE ALWIS J AND SENEVIRATNE. JS C APPEAL No. 48/84; CA No. 86/75 (F). D C COLOMBO No 2543/52.DECEMBER 1.2. 3. 4 AND 9. 1986
Sale-Shares-Setting, aside of sale on grounds of laesio enormis. duress, undueinfluence, wilful misrepresentation, and fraud-Meaning of undue Influence.
Civil Procedure-Civil Procedure Code. Section 772-Cross Appeal-Failure to givenotide of objection of undue influence-Inherent jurisdiction-Meaning of undueinfluence.
The plaintiff held 500 shares in Consolidated Commercial Agency Ltd (CCA) and 1251shares in Ceylon Manufacturers and Merchants Ltd. (CMM) He was also a Director ofthese two companies which had been formed on the initative of one E. W. Miller to takeover some of the lines of business of Colombo Commercial Co. Ltd.
About 1967 the plaintiff became ill and in December 1968 and January 1969suffered a serious nervous breakdown He was given six months leave to proceed toLondon for treatment. His disease was diagnosed as manic depression On25 01 1969 Miller and the defendant obtained plaintiff's signature to a letter ofresignation from the directorate of CMM and CCA. On 26 01 69 the defendant andone Mallory Wijesinghe both directors of the two companies visited the plaintiff at hisresidence when he was just about to leave for the airport and obtained his signature toseveral share transfer forms and receipts -nd handed him some cheques representingto him that he was being paid a fair value nr his shares in the two companies In July1969 the plaintiff returned to Sri Lanka fui; restored to health On 08 06 1970 theplaintiff wrote to the Chief Accountant CCA _d calling for a cheque for Rs 5,000 forhis 500 CCA shares After sending a letter ot demand on 18 05 1971 plaintiff filed thisaction complaining that the defendant had pressuosed him into transferring his 1 7,499CMM shares at Rs. 13 per share when a share was worth Rs. 57 7.8 and his 500 CCAshares at Rs 10 per share when a share was worth Rs 1 22.09 The plaintiff claimedrescission of the sales on the ground of laesio enormis and on grounds of undueinfluence, duress, wilful misrepresentation and fraud The District Judge upheld the pleaof laesio enormis but rejected the other grounds. The defendant appealed to the Courtof Appeal which ordered rescission of the sale on the ground of undue influence. Thedefendant appealed to the Supreme Court and as a preliminary matter submitted that itwas not open to the Court of Appeal to review the finding of the District Judge on undueinfluence in the absence of a cross-appeal by the plaintiff or written notice giving sevendays notice under s 772 CPC that a review of the District Judge's finding on undueinfluence will be sought.
Where no cross-appeal has been filed, the plaintiff’s failure to give seven dayswritten notice under s. 772 CPC will not entitle him to a right to take objection tothe decree. But s. 772 of the CPC does not bar the court, in the exercise of itspowers to do complete justice between the parties, from permitting objection tothe decree even though no notice had been given. The Court of Appeal hasinherent jurisdiction to grant or refuse such permission in the interest of justice.
A respondent not taking any objection can without filing any cross objectionssupport the decree not only on the grounds decided in his favour but also by urgingthat the grounds decided against him should have been decided in his favour Hemay thus challenge a finding against him although the decree may be in his favour.But a respondent cannot attack the decree in the appellant's favour without filing across-appeal or giving notice of objections under s. 772 CPC
Undue influence is the unconscientious use by one person of power possessed byhim over another in order to induce the other to enter into a contract. The victim ofsuch pressure may be entitled to relief under the common law of duress or underthe equitable doctrine of undue influence. Equity gives relief where an agreementhas been obtained by certain forms of improper pressure which did not amount toduress at common law because no element of violence to the person was involved.Mere persistence or pestering by a person not in any fiduciary relationship is notundue influence.
'Contracts which may be rescinded for undue influence fall into two categories:
Where there is no special relationship between the parties.
Where a special relationship of confidence exists.
In the first case undue influence must be proved as a fact and the onus of proof ison the donor. In the second case undue influence is presumed to exist and the onusis on the party taking the benefit to justify theit it was free from undue influence. TheCourt will not save a person from his folly, imprudence or want of foresight but itwill intervene if the plaintiff proves that the defendant exerted domination and bythe use of improper pressure prevailed on him to consent to a transaction thatwould otherwise not have been entered into.
There is no rule 'defining inflexibly what kind or amount of compulsion shall besufficient ground for avoiding a transaction. The question to be decided in suchcase.is whether the party was a free and voluntary agent, whether there was actualcoercion by the other party, whether the latter exercised over the mind of the othersuch a degree of general domination or control that his independence of decisionwas substantially undermined.
In the instant case there was no fiduciary relationship between the contractingparties. Mere persisting, worrying and pestering is not undue influence. There wasno evidence whatsoever of any threat or infusion of any fears for the future or thepresent in plaintiff's mind. Further there was significant delay in repudiating the salewhich tends to show the absence of compulsion. Hence the Court of Appealmisdirected itself in concluding that undue influence vitiated the transfer of shares.
Laesio enormis is a Roman and Roman-Dutch law concept applicable to rescind
sales and leases where the damage suffered is more than half of the value of thesubject-matter.■
In Sri Lanka laesio enormis is applicable to rescind sales of immovable property but itcannot be applied to rescind transfers of shares in a limited liability company asshares do not fit into the Roman and Roman-Dutch law classification of movablesand immovables.
. Does laesio enormis apply to sales of movables in Sri Lanka ?
Although s. 63 of our Companies Ordinance 1939 provides thaf shares shall bemovable property this is for the purposes of the provisions of the CompaniesOrdinance only and not for purposes outside the province of Company Law. A'share is neither movable or immovable property as known to the Roman orRoman-Dutch law. It is a bundle of rights and liabilities It is an English law conceptand a typical item of property of the modern commercial era in a distinct class of itsown. It is a chose in action.
The District Judge misdirected himself in applying the principle of laesio enormis torescind a transfer of shares.
Cases referred to:
Bridget Antony v. Imelda Weerasekera-(1953) 54 NLR 553 PC
Earl of Aylesford v. Morris-(1873) 8 Ch. App. 484. 490.
Mutual Finance Ltd.v. Wetton (John) & Sons Ltd- 2 All ER 657. 661.
Allcard v. Skinner-(1887) 36 Ch. D. 145. 181. 182
William v. Bayley-(1866) L.R. 1 H.L. 200. 35LJ Ch. 717; 14L.T. 802.
Tufton v. Sperm-(1 3_ 2 LTR 516. 526. 530 C.A.
National Westminister Bank v. Morgan- 1 All ER 821, 828.
Tate v Williamson-II866) 2 Ch. App 55. 60; 15 L .T. 549.
Kaufman'v. Gerson-( 1904] 1 KB 591
McGee v. Mignon-fl 903) T S. 89.
Coetze v. Pretorins-(l903) TS 638.
Tjollo Ateljees (Eins) Bpk v Small- 1949 (1) SALR 856 (AD).
Gooneratne v. Don Philip-(1899) 5 NLR 268.
Jayawardene v Amerasekera-( 1912) 15 NLR 280.
Punchirala v Ahamat- (1924) 5 CL Rec 227.
Sobana v. Meera Lebbe-( 1940) 5 CL) 46
Fernando v. Femando-(1916) 19NLR21
Wljesiriwardene v. Gunasekera-(1917) 20 NLR 92.
Bodigav. Nagoor-(1943) 45 NLR 1
Ponnupillai v. Kumaravetpillai-(1963) 65 NLR 241.
Appuhamyv. Keerala-(1970) 73 NLR 422.
Short v. Treasury Commissioners-f1948] 1 KB 116. 122.
Barland's Trustee v. Steel Bros. & Co. Ltd.- 1 Ch. 279, 288.
Rex v G.M Holdings Ltd.- 1 All ER 224. 226.
APPEAL from judgment of the Court of Appeal.
Mark Fernando P. C. with Daya Pelpola and Miss S. Wijegunasekera for defendantappellant.
D. R. P Gunatillake with S. D. de S. Gunasekera. Neil Perera and Victor Unantenne forthe responded.
Cur. adv. vult.
May 26. 1987.
The plaintiff-respondent (hereinafter referred to as the plaintiff)instituted this action on 21 1.72 to set aside his sale to the defendantof 500 shares in Consolidated Commercial Agency Ltd., (hereinafterreferred to as 'CCA'), and 1,251 shares in Ceylon Manufacturers andMerchants Ltd., (hereinafter referred to as 'CMM'). The date of salewas 26.1.69. The grounds upon which the defendant sought to setaside the transfer/sale of the shares are-
Laesio enormis and
Duress and/or undue influence and/or wilful-misrepresentationand/or fraud.
The defendant in his answer denied these allegations.
At the outset of the trial it was admitted that the plaintiff was on26.1.1969, the owner of 500 shares in CCA and was an ExecutiveDirector of the Company. It was also admitted that the plaintiff wasthe owner of 17,499 shares in CMM and was a Director of the saidCompany on the said date The case for the plaintiff as set out in hisplaint was that the said 17,499 shares which the plaintiff held in CMMh.ad been transferred by the 'plaintiff as follows
To Mrs. C. Seneviratne, 13,746 shares at the rate of Rs.
13.00 per share;
To Mallory Wijesinghe 1,251 shares at the rate of Rs. 13.00per share.
To the defendant 1,251 shares at the rate of Rs 13.00 pershare and
To one S. H. P. M. Nizar, 1,251 shares at the rate of Rs. 1 3.00per share.
The plaintiff had also transferred 500 shares which he held in CCA tothe defendant at the rate of Rs. 10/- per share.
The plaintiff stated that at the date of the said'transfer of shares thetrue value of the said 17,499 shares in CMM was Rs. 1#,011,092.22at the rate of Rs. 57.78 per share and the true value of .said 500shares in CCA was Rs. 61,045/- at the rate of Rs. 122.09 per share.The case of the plaintiff was that the price paid by the defendant to theplaintiff for the transfer of the said 1,251 shares in CMM was lessthan 1/2 the true value of the said shares, at the time and date oftransfer to the defendant and the said sale of 500 shares in CCA wasalso less than 1 /2 the true value of the shares at the date of transfer tothe defendant.
The plaintiff stated "that from 1 967 he was not keeping good healthand on 27.1 2.68, he was granted six months' medical leave to enablehim to proceed overseas for treatment and accordingly the plaintiffmade the necessary arrangements to leave for the United Kingdom on26.1.1969 by plane. According to Plaintiff in December 1968, andJanuary 1969, he was suffering from a serious nervous breakdown.
It appears that the two companies CMM and CCA were floated byone E. W. Miller, who had an interest in Colombo Commercial Co.,Ltd. CCA & CMM eventually took over the business of some of thedepartments of Colombo Commercial Co. Ltd., while CMM took overthe business of Estate Supplies, hardware, electrical and agriculturalequipment and became, the successor to the Stores and SalesDepartment of Colombo Commercial Co. Ltd CCA took over the
flotrrotio v- uwmvi
Estate Agency busingof Colombo Commercial Co. Ltd. In 1963Miller invited the plaintiff and the defendant to become shareholdersand Directors of CCA & CMM.
E. W. Miller was a very close friend of the plaintiff from about 1950.In paragraph six of the plaint the plaintiff states "on 24.1.69 the saidE. W. Miller sent for him and requested him to resign from theDirectorate of the two companies on the plea that they wereconsidering an expansion program and that plaintiff’s ill-health wouldconstitute an impediment to their implementation."
According to plaintiff on 25 1.69, when he was in a weak state ofmind and in ill-health, the said Miller and the defendant brought typedletters of resignation and obtained his signature to the said letters; bythe said letters of resignation he resigned from the Directorate of CCAand CMM. The said resignation was according to plaintiff obtainedfrom him by duress and pressure exercised by the said Miller anddefendant.
In paragraph 7 of the plaint the plaintiff states -"On the 26.1.59, shortly before he left for Katunayake to catchhis plane to U.K. the defendant and one Mallory Wijesinghe, both ofwhom were directors of the said Company, came to the plaintiff'sresidence while the plaintiff was in the final stages of packing hisbaggage, produced certain transfer forms, transferring his shares inthe said two companies, several cheques and receipts and informedthe plaintiff that he should sign these documents and therebytransfer his shares in the said two companies and represented tothe plaintiff that he was being paid a fair value for the said shares;when he stated that he thought that the par value was much morethe defendant and Mallory Wijesinghe assured him that they hadplaced a fair value and thereby induced the plaintiff by the exerciseof duress, fraud, undue influence and wilful misrepresentation, whilethe petitioner was in a weak state of mind and health and when hewas about to get into the car to proceed to Katunayake to sign thesaid transfer documents and receive the said cheques.
At the time of the said transfer he was under severe mental stressand strain and also was in a feeble state of health atfd mind. Takingadvantage of plaintiff's state of mind and body the said MalloryWijesinghe and the defendant obtained the said transfer by theexercise of duress and/or undue influence and/or fraud and or wilfulmisrepresentation on the plaintiff. ”
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By his answer the defendant denied in December 1968 and July1969 the plaintiff was suffering from any serious nervous breakdown;admitted that plaintiff was not keeping in good health, and that theplaintiff was on 27.12.68 granted six months medical leave, to enablehim to proceed overseas for treatment. The defendant denied theallegations of duress and undue influence, fraud and wilfulmisrepresentation made by the plaintiff and also denied the avermentsrelating to the value of the shares purchased by him.
The case proceeded to trial on ten issues, covering the grounds oflaesio enormis and duress etc. After trial the District Judge answeredthe issues relating to the cause of action based on laesio enormis infavour of the plaintiff but found against the plaintiff's alternative causeof action based on duress, fraud, undue influence and wilfulmisrepresentation. He accordingly made order that the defendantshould pay the plaintiff Rs. 99,857/- which represented the differencebetween the purchase price and what he considered to be the truevalue of the shares. The District Judge made further order that if thissum was not paid within six months the sale of the shares would standcancelled and the plaintiff return the purchase price to the defendant.He held that a share in CMM and CCA was worth Rs. 97.90 and Rs.57.69 respectively. The defendant preferred an appeal from the saidjudgment. At the hearing of the appeal before the Court of Appeal,counsel for the plaintiff-respondent contended that the finding of thetrial Judge relating to the exercise of undue influence was wrong andinvited the court to reverse that finding. Counsel for the defendantunsuccessfully objected to the plaintiff being heard on the issue ofundue influence as the trial Judge had found in his favour on thatissue, and the plaintiff hgd not filed any cross appeal as required bySection 772 of the Civil Procedure Code.’
Counsel for the plaintiff-respondent urged that on the totality of theevidence accepted by the trial Judge, his finding on the issue of undueinfluence was unreasonable and untenable. He did not challenge thecorrectness of the finding of the Distirct Judge that duress,misrepresentation and fraud had not been established. The Court ofAppeal by its Judgment set aside the finding of the trial Judge on theissue of undue influence and directed that decree be entered settingaside the sale by the plaintiff to the defendant of the shares in the twocompanies and ordered the plaintiff to return to the defendant theconsideration paid in respect of the aforesaid shares: The defendanthas preferred this appeal from the judgment of the Court of Appeal.
Ratwatte v. Goonesekera (Sharvananda. C.J.)
At the outset of the hearing before this court, Mark Fernando,counsel for the defendant-appellant referred to his preliminaryobjection that it was not open to the plaintiff to canvass before theCourt of Appeal the finding of the trial Judge on the issue of undueinfluence against the plaintiff, as the plaintiff had not filed any crossappeal in terms of section 772 of the Civil Procedure Code whichprovides that:
Sec. 772 (1) Any respondent, though he may not have appealedagainst any part of the decree, may, upon thehearing, not only support the decree on any of thegrounds decided against him in court below, but takeany objection to the decree which he could havetaken by way of. appeal provided he has given to theappellant or his Proctor seven days notice in writing ofsuch objection.
(2)' Such objection shall be in the form prescribed inparagraph (1) of section /bb.
This section requires the respondent, if he had not filed across-appeal to give the appellant or his Proctor seven days notice inwriting to entitle him to object to-the decree or any part of the decree,entered by the trial court. Only if he had duly given the said notice, willhe have a right to object to the decree; if he had failed to give suchnotice, he cannot claim, as a matter of entitlement, the right to takeany objection to the decree; but the provision does not bar the court,in the exercise of jts powers to do complete justice between theparties, permitting him to object to the decree, even though he hadfailed to give such notice. The Court of Appeal has inherent jurisdictionto grant or refuse Such permission in the interest of justice. If howeverthe respondent is not taking any objection.to the decree, it iscompetent to him without filing any cross objections to support thedecree not only on the grounds decided in his favour but also on thegrounds decided against him, by asserting that the points decidedagainst him should have been decided in his favour; he may thuschallenge a finding against him although the decree may be in his• favour. But a respondent cannot attack the decree in the appellant'sfavour without filing a cross-appeal or cross-objections under thissection.
In this case the decree entered in the trial court was founded on thealternative cause of action based on the plea of laesio enormis andhence there was the conditional order to pay the difference betweenthe purchase value and the true value.
on L&nK& l&w ntffjm is
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Had the decree been entered on the main cause of action based onundue influence the decree would have declared the sale of sharesvoid and the plaintiff might have been better off.
Admittedly the plaintiff had not complied with the provisions ofsection 772 of the Civil Procedure Code to entitle him to agitate inappeal for a decree avoiding the sale of the shares on the ground ofexercise of undue influence. But the Court of Appeal granted himpermission to challenge the finding of the trial Judge on the questionof undue influence and heard him on that issue, as it was of the viewthat-
"the main object of section 772 of the Civil Procedure Code wasto prevent the appellant from being taken by surprise at the hearingof the appeal and as the appeal was heard over a long period of timeand between the date on which counsel for the plaintiff indicated tocourt that he was challenging the finding of the trial Judge on theissue of undue influence and the date on which counsel for thedefendant replied to the submission of counsel for the plaintiff onthat aspect of the case, a period of no less than seven weeksintervened and the court was satisfied that the defendant's counselhad an opportunity of making his submissions fully on the questionof undue influence, both orally and in writing and as in thecircumstances no prejudice whatever was caused to the defendantby the failure on the part of the plaintiff to file cross-objections interms of section 772 of Civil Procedure Code."
We cannot say that the Court of Appeal had in the circumstances,erred in granting permission to counsel for plaintiff to canvass thefinding on undue influence. After granting that permission the courtheard both parties and revised the finding of the District Judge. On theappeal before us counsel for both parties addressed us fully on theissue of undue influence and on the findings on it by the court below.
The English law relating to undue influence is part of the Law o'fCeylon, vide Bridget Antony v. Imelda Weerasekera, (1).
A contract may be avoided or set aside at the instance of one of theparties to it on the ground that his consent thereto was obtained byduress or undue influence, where his consent had been obtained bysome form of pressure which the law regards as improper Undueinfluence may be defined, for this purpose, as the unconscientious use
by one person of power possessed by him over another in order toinduce the other to enter into a contract (Earlof Aylesford v. Moms (2)per Lord Selbourne, LC)
The victim of such pressure may be entitled to relief under thecommon law of duress or under the equitable doctrine of undueinfluence. Equity gives relief where an agreement has been obtainedby certain forms of improper pressure which did not amount to duressat common law because no element of violence to the person wasinvolved. For example, a promise to pay money can be set aside ifobtained by a threat to prosecute the promiser or his close relative.Mutual Finance Ltd. v. Wetton(3)
Contracts which may be rescinded, for undue influence fall into twocategories. Firstly, those where there is no special relationshipbetween the parties; secondly, those where a special relationshipexists. In the first case, influence must- be proved as a fact, in thesecond it is presumed to exist. In the first case, it must be affirmativelyproved that one party in fact exerted influence over the other and thusprocured a contract that would otherwise not have been made. Undueinfluence has been described as “some unfair and improper conduct,some coercion from outside, some overreaching, some form ofcheating and generally though not always some personal advantageobtained by the guilty party (Allcard v. Skinner (4) per Lindley, L. J).The cases in which this jurisdiction has been exercised are instanceswhere dominion has been exercised by one person over another,thereby precluding the exercise of free and deliberate judgment. Aleading case on the subject is William v. Bayley (5) where the factswere as folldws-a son gave to his bank several promissory notesupon which he had torged the endorsements of his father. At ameeting between the three parties, the banker made it reasonablyevident that if some arrangement were not reached the son would' beprosecuted. This impression was conveyed in such expressions as:-"We have only one course to pursue; we cannot be parties tocompounding a felony; this is a serious matter, a case oftransportation for life!". The effect of these expressions upon the fatheris shown by his somewhat despairing words: What be I to do? Howcan I help myself. You see these men will have their money." In theresult the father agreed in writing to make an equitable mortgage tothe bank in consideration of the return of the promissory notes. Thisagreement was held to be invalid on the ground that undue pressurehad been exerted. The bankers had clearly exploited the fears of the
father for the safety of the son and had thus brought themselveswithin the equitable principle that, where there is inequality betweenparties and one of them by taking an unfair advantage of the situationof the other forces an agreement upon him, the transaction will beset aside-per Lord Chelmsford at 216. This is a case of actualcoercion.
Undue influence connotes domination. Evidence of expressinfluence must be adduced by the party seeking to impeach thetransaction. If it can be shown that one party exercised suchdomination over the mind and will of the other, that his independenceof decision was substantially undermined, the party whose will wasoverborne will be entitled to relief on the ground of undue influence.There is no need for any special relationship, as in the second case toexist between the parties. The mere fact that domination wasexercised is sufficient; no-abuse of confidence need be proved. Theplaintiff will have to prove that his mind was "a mere channel throughwhich the will of the defendant operated" (Tufton v. Sperni (6)), thatthere was. actual coercion by the defendant or that the defendantexercised over the plaintiff's mind such a degree of generaldomination or control that his independence of decision wassubstantially undermined.
– In the second case, if the parties were at the time of thetransaction in a particular relationship of confidence with each other,undue influence is presumed. The onus is on the party taking thebenefit to justify that it was free from undue influence. Where thedonee stands in a fiduciary relation to the donor, a presumption ofundue influence arises which prevails unless rebutted by the donee.
Lindley L. J., in Allcard v. Skinner (supra) sets out the principle onwhich the court had proceeded to deal with cases of undue influence-
"What then is the principle? Is it that it is right and expedient tosave persons from the consequences of their own folly? Or is it thatit is right and expedient to save them from being victimised by otherpeople? In my opinion the doctrine of undue influence is foundedupon the second of these two principles. Courts of equity havenever set aside gifts on the ground of the folly, imprudence or wantof foresight on the part of donors. The courts have always
repudiated any such jurisdictionOn the other
hand, to protect people from being forced, tricked or misled in any
way by others- into parting with their property is one of the mostlegitimate objects of all laws …… The undue influence which
courts of equity endeavour to defeat is the undue influence of oneperson over another."
Lord Scarman with whom all the other Law Lords agreed, inNational Westminister Bank v Morgan (7) approved the aboveenunciation of Lindley L. J. and stressed that the principle justifying thecourt setting aside a transaction for undue influence is not vaguepublic policy but specifically the victimisation of one party by the other.
In Tufton v. Sperni (supra) Jenkin L J., observed-
“There can be no doubt that the plaintiff was overreached by thedefendant in the transaction concerning No. 36 Doughty Street. . .
. But the mere fact that a simpleton in business has made animprovident, or even ruinous, bargain with a person astute andunscrupulous enough to take advantage of his simplicity does not ofitself entitle the victim to relief, at all events, where, as here, thetransaction has been completed. The court will not intervene unlessthe case can be brought within some recognised exception to thegeneral rule that a person who in the eye of the law, is capable ofmanaging his own affairs is bound by a disposition he chooses tomake however damaging to himself it may be. A familiar exceptionto the general rule occurs in cases where the bargain has beep heldto have been induced by fraudulent representation, but that is not inquestion here. It is however, argued on the part of the plaintitl thatin the circumstances of the present case the defendant stood infiduciary relationship to the plaintiff, which he abused by prevailingon the plaintiff, to purchase the defendant's own property on termsoutrageously favourable to the defendant; and that in suchcircumstances the court can and should set aside the transaction."
In Tufton v. Sperni (supra) the plainiff who was the purchaser ofdefendant's house on terms grossly unfair to him, sought to have thetransaction set aside on the ground of undue influence. The trial Judgefound that undue influence-the domination of the purchaser by theseller-was not proved. The purchaser appealed on the ground thatthe court of equity had a broad jurisdiction to relieve a person from abargain made with another where that other person stood in such arelation to the first person that he owed him a duty to make fulldisclosure of all material facts. Held, allowing the appeal, that in all the
circumstances of the case there was a fiduciary relationship betweenthem and that the purchaser reposed confidence in the seller whichwas abused. The transaction was accordingly set aside. It is to benoted that when the plaintiff-set ou: to prove that the defendant had,by virtue of his professional position and otherwise, acquired acomplete control or domination over the plaintiff, that the latterceased in effect to be a free agent, and his mind became a merevehicle for defendant’s schemes, the trial Judge held that the plaintifffailed to discharge the -onus of proof laid on hirn. But the plaintiffsucceeded in appeal on a fresh ground disclosed by the facts, namelyon the broad jurisdiction of the court of equity to relieve a party from abargain made with another where it is shown that the other stood insuch a relation to the first party that he owed him a duty of care andcandour and was bound to make to him full disclosure of all materialfacts. Sir R. Evershed, M R. correctly said at page 525-
"In my judgment, the question is not of domination but ofinfluence, well short, no doubt of domination, based on and arisingout of a particular association and an advisory capacity. …"
In that case, the Court of Appeal had held that a fiduciary relationshipexisted between the parties, which had the result that one reposed' confidence on the other.
"When this is so the person receiving and accepting theconfidence.is inevitably so placed that he can exercise influenceover the other. It would seem to be but common decency thatpersonal profit should not then be gained by exploiting the influenceresulting from the confidence reposed and acknowledged." MorrisL. J. at 533. •
The court set aside the transaction on the ground of undue influenceflowing not from domination by the defendant over the plaintiff butfrom the fiduciary relationship between the plainfiff and defendent withthe result that the latter had the influence inevitably stemmingtherefrom. The court said that the relation between the parties wassuch that, in such matters confidence was reposed and influence wasnecessarily possessed. The jurisdiction of the court to interfere isfounded on the principle of correcting abuses of confidence. LordChelmsford, L.C., stated the principle in Tate v. Williamson (8)—
I IMtrrouc ». UW>>C<7C<CIa 1lO<-VO>IOItJVt,
'Wherever two persons stand in such a relation that while itcontinues, confidence is necessarily reposed by one and theinfluence which naturally grows out of that confidence is possessedby the other, and this confidence is abused or the influence isexerted to obtain an advantage at the expense of the confidingparty, the person so availing himself of the position will not bepermitted to retain the advantage, although the transaction couldnot have been impeached if no such confidential relation hadexisted.”
In the present case, the plaintiff does not suggest the existence ofany special relationship between him and the defendant which attractsany presumption of undue influence. Both plaintiff and defendant werebusiness men. Both regarded the impugned transaction as a businesstransaction and were dealing with each other at arms' length. Theywere both share holders in the aforesaid two companies. Butshare hofders are not trustees of one another. True that plaintiff was asick man preparing to leave for England- for ireatment but there wasnot that fiduciary relationship between plaintiff and defendant whichresulted in confidence being reposed by plaintiff on defendant. Therewas no question of any confidential relationship existing between thetwo, such as to give rise to the presumption of influence of one overother. Hence, the plaintiff has ’to prove that defendant exerteddomination over him and by improper pressure prevailed on him toconsent to the transaction that would otherwise not have been made.Did the defendant use undue influence to procure the contract – theentire onus was on plaintiff to prove undue influence in the sense ofsome coercion, some overreaching; was the sale of the sharesobtained by any form of improper pressure on him?
As to what kind of influence can vitiate a contract between thirdparties. Porter, J., quoted with approval in Mutual Finance Ltd. v.Wetton & Sons Ltd. (supra) the following passage from Salmond andWinfield on Contracts (1927) at page 259;
"Assuming, then, that the common law of duress has been tnussuperseded by the equitable doctrine of undue influence, the■ question remains, what forms of coercion, oppression orcompulsion amount to undue influence invalidating a contract asbetween strangers between whom there exists no fiduciary relation.How is this line to be now drawn between those forms of coercionor persuasion which are permissible and those which the law
Sri Lanka Law Reports
11UO/J * on L.n.
recognises as unlawful and as a ground of contractual invalidity? Tothis question it is impossible, as the authorities at present stand togive any definite or confident reply. In the case already cited ofKaufman v. Gerson (9) it is suggested that the line should be drawnby reference to general considerations of public policy, the questionin each case being; 'Is the coercion or persuasion by which thiscontract was procured of such a nature that the enforcement of acontract so obtained would be contrary to public policy?' Just as acontract may be invalid because it is contrary to public, policy in itssubstance or its purposes, so it may be invalid because it is contraryto public policy in respect of the coercive method of itsprocurement…Where the instrument of coercion is the doing orthreatening of a wilfully illegal act of any description.. a contract soprocured will in general be held invalid. But even although theinstrument' of coercion is not thus in itself illegal as in the case of athreat of prosecution, the enforcement of a contract so procuredmay nevertheless be held in appropriate cases to be contrary topublic policy."
There is no rule defining inflexibly what kind or amount ofcompulsion shall be sufficient ground for avoiding a transaction. Thequestion to be decided in each case is whether the party was a freeand voluntary agent, whether there was actual coercion by the otherparty, whether the latter exercised over the mind of the other such adegree of general domination- or control that his independence ofdecision was substantially undermined.
However damaging to himself the transaction may be the court willnot intervene unless the case can be brought within some recognisedexception of the general rule that a person who, in the eye of the law,is capable of managing his own affairs is bound by the disposition hechooses to make. It is not the case of the plaintiff that though he was asick person, he was not at the relevant time mentally capable ofmanaging his affairs. His mental or contractual capacity to enter thetransaction in question was not in issue. He understood the nature ofthe transaction, though according to his doctor, his judgment wasimpaired. Weakness of mind, short of mental disorder as prevents aperson understanding the nature of the transaction does not affordper se ground for relief at law or in equity, although undue influence bythe other party may permit the transaction to be set aside asinequitable – vide Chittyon Contracts,Vol. I, 23rd Ed. para 381, page'183.
CARatwatte v. Goonesekera (Sharvananda. C.J.)275
It was common ground between the plaintiff and defendant that theplaintiff was not in good health since 1967. In 1968 the company hadgranted him three months leave for reasons of health. Again theCompany gave him six months leave in December 1968 to proceed toLondon for medical treatment. He had been treated by Dr.Sittampalam, a psychiatrist in 1967 and 1968. The particular ailmentfrom which the plaintiff was suffering is known as manic depression.According to Dr. Rodrigo, Professor of Psychiatry in the MedicalFaculty of the Peradeniya Campus who had once seen the plaintiffbefore he left the Island on 26th January 1 969, a patient sufferingfrom manic depression would have his judgment fairly seriouslyimpaired and that the depressed condition would affect his judgmentnot merely in regard to certain matters but practically in regard to allmatters.
The Court of Appeal after referring to the evidence of Dr.Sittampalam and Professor Rodrigo, has concluded that-
"Thus, it is seen that on the medical evidence, it was clearlyestablished that the plaintiff had been suffering from a .mentaldisorder known as nanic depression for a long time prior to January1969. In January 1969, also he was in a depressed state of mind,was under severe medication and was lacking in the power to
concentrateThis then was the state of mind of the plaintiff on
the day he transferred the shares to the defendant, namely, on 26thJanuary 1969."
The sequence of events during the period 22nd to 26th Januarv1969, is relevant to appreciate whether the plaintiff was the victim otany domination or pressure by the defendant causing the plaintiff totransfer his shares to the defendant. In this context the important roleplayed by Miller to whom both plaintiff and defendant were grateful forhaving made them shareholders and directors of the two compr nies,which he had established, in the transaction in issue has to be kept inmind. No allegation has been made by plaintiff against Miller that hewas more interested in defendant than in the plaintiff or that Miller hadconspired with the defendant and other shareholders to terminate hisconnection with the two companies or that what motivated Miller topersuade plaintiff to part with his shares in the two companies wasanything other than the welfare and expansion of the two companiesUnfortunately the court does not have the benefit of Miller's evidencewhich would have shown the transaction, complained of, in its trueperspective.
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Miller arrived in Ceylon on the 23rd or 24th of January 1969. Heand defendant met the plaintiff at about 3 p m. on the evening of the24th. According to plaintiff. Miller and defendant told him at thatmeeting "You have been ill periodically. We have nothing against you.This will be an impediment to the expansion of the Company, we areintending to undertake, so it will be in the company's interest if you callit a day" and they wanted him to resign from the directorate andpromised to. compensate him adequately for theinterests-shareholdings he held in the companies; they mentioned afigure in the region of 2 or 2 1/2 lakhs. The plaintiff continued-
"I was not agreeable. I wanted time to think it over and come backfrom leave and decide. They knew that I was going to London onleave in two days time. I had arranged to leave for London on 26thJanuary. The defendant and Miller were fully aware of that. I saidthat I will come back and decide on the request. They kept onpestering. I said 'come and see me in my bungalow' and I left. Thatevening they were worrying me and they were pressing me toaccept these conditions and all sorts of things. As they keptworrying me, .1 said If you want to meet me you come to mybungalow…. The defendant and Miller came to my bungalow atabout 7 o'clock. They kept worrying me. I could not take it anylonger and I just signed the resignation from the directorate… I justwanted to get rid of the worry and I signed resigning from thedirectorate of the two companies. Then they indulged in myhospitality. They said that they will settle about my shares the next
morning On 26th January when I was in the final stage of
packing and prior to half-an-hour of my leaving Mr. MalloryWijesinghe and Mr. Ratwatte (the defendant) came. They camewith a whole sheaf of papers, receipts, cheques, most of which Icould not even familiarise myself with; collecting a whole heap ofcheques and signing a receipt in full and final settlement I signedseveral transfer forms and several receipts. I put the cheques intomy pocket and went to the airport. I stopped at Madras. At Madras Iexamined the cheques. According to the cheques listed one chequefor the purported value of the shares of C.C.A. was missing. Iposted the cheques from Madras to the Bank of Ceylon asking themto deposit it with John Keel on fixed deposit. I got cheques to thetotal value of about Rs. 225,000.1 knew these were for the transferof shares of both these companies." To the question in examinationin chief 'Did you at that time know, for what you were selling the
Ratwatte v. Goonesekera (Sharvananda, C.J.)
shares?’ Plaintiff's reply was "Afl I told Mr. Mallory Wijesinghe andKenneth Ratwatte before I left was "I think you were doing medown." I also said "You have not paid my Provident Fund." They said'Don't worry, please go and get well and come, vye will look afteryou. They were good friends."
The plaintiff returned to Ceylon in good health in July 1969. He saysthat he did not meet the defendant because ’I thought they had doneme down.' But plaintiff until he sent the letter of demand P23 dated18.5.71 and filed this action on 21 st January 1972, never protestedto the defendant or to Mallory Wijesinghe or to Miller or to anybodyelse, that his sale of the shares was not voluntary though on 8th June1970, in his letter to the Chief Accountant CCA Ltd. (D11) he hadcomplained that he did not receive payment from defendant for the500 shares in CCA Ltd., and requested that a cheque for Rs. 5000 besent to him. The delay in repudiating the sale of the shares issignificant. The trial judge had adverted to this delay and remarked "Iam of opinion that the delay to intimate a claim to the defendant isconstruable as an affirmation of the transaction, assuming without soholding that there was undue influence. As I have held that there is noundue influence, the question of affirmation is irrelevant." The Corut ofAppeal has countered "the question of affirmation of the transactionby delay or acquiescence was never put in issue at the trial. Theplaintiff had no opportunity of leading evidence on this matter. In theabsence of an issue, I am of the view that this finding is unwarranted."In my view, the Court of Appeal has missed the significance of thetime lag relevantly referred to by the trial judge. Had the transfer of ^hnshares by the plaintiff been forced out of the plaintiff by undueinfluence, and not been a voluntary one, would not the plaintiff havecomplained of the undue influence and disowned the transaction 3osoon as he returned, fully restored in health, to Ceylon in July 1969?The delay only tends to show that there was no question of theplaintiff being compelled to transfer the shares, that plaintiff neverregarded himself as being coerced by the defendant or by anybodyelse to transfer the shares. It was not a question of affirmation of atransaction vitiated by undue influence, but evidence that he was aconsenting party. In my view, the plaintiff did not complain of anyundue influence for about two and a half years because he did not lookupon the transaction as one that had been forced out of him. It is to benoted that in the aforesaid letter dated 8th June 1970 (D11) theplaintiff had called for the sum of Rs. 5000 which represented the
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price of the five hundred shares in CCA Ltd. This request was made onthe basis that the transaction was a voluntary one. The Court ofAppeal has commented that "the suggestion was made, the decisionwas taken and it was fully implemented between the afternoon of 24thJanuary and the mid-day of the 26th January and it is clear that thesuggestion that the plaintiff should resign and sell his shares wassuddenly sprung upon him prior to his departure to London fortreatment and that too, for a mental ailment." From this hustling onecannot spell coercion and rule out independent judgment on the part■ of plaintiff.
The plaintiff and defendant are more or less agreed on the times anddates between 24th and 26th January in which they along with Mr.Miller and Mr. -Mallory Wijesinghe met and discussed the question ofplaintiff's resignation and the transfer of the shares. However whilethe plaintiff states that the defendant and Miller kept on persisting,worrying and pestering him to agree to their suggestion, thedefendant asserts that the discussions were friendly, cordial anddevoid of any antagonism. The trial judge has preferred to accept theevidence of the defendant to that of the plaintiff. With regard to thecomparative veracity of Ratwatte and Gunasekera the plaintiff himselfcomplemented Ratwatte as not being as astute businessman. He did’not show a flashing imagination of the type Gunasekera is endowedwith and did not display the ready wit. He spoke of the few significantevents and incidents he was called upon to depose to convincingly. Heappeared to be not as clever as Gunasekera in the witness box. I preferto believe him.
The plaintiff's case is that he resigned his directorship andtransferred the shares, not on his initiation but because Miller anddefendant kept on “persisting, worrying and pestering him when hewas in a. weak state o f mind and health to agree to their suggestion. Itis this 'persisting, worrying and pestering' indulged in by defendantand Miller that influenced him to agree to their suggestion. It is verysignificant that the plaintiff does not anywhere in his pleading or in histestimony, go so far as to state specifically that he was pressurised orcoerced to resign from his directorate and transfer the shares. Henot say that the defendant and Mallory Wijesinghe would not allowhim to depart to the airport until and unless he transferred the sharesto them. The trial Judge has found that "there is no evidencewhatsoever that there was a threat of any kind or the infusion of anyfears for the future or the present into Gunasekera’s mind." Counsel
Ratwatte v. Goonesekera (Sharvananda. C J)
for the plaintiff did not challenge this finding. The Court of Appeal hasfailed to address its mind to the ingredients of undue influence. Thecourt's finding that the defendant exercised undue influence is basedon its conclusion that the plaintiff to the knowledge of the defendant,suffered from a serious mental ailment and that Miller and thedefendant kept on worrying and pestering him with their suggestionand this is indicative of the exercise of undue influence. No authorityhas been cited for the proposition that persistence or pestering by aperson who is not in any fiduciary relationship to the other is sufficientto qualify as undue influence. The defendant did not possess at anystage, any power over the plaintiff and the plaintiff was not in thepower of the defendant or of Miller or of Mallory Wijesinghe. Therewas no question of the defendant or the others having a dominatinginfluence over the plaintiff. Pestering may annoy a person but is notsufficient to compel or coerce him to do something against his will.The classic case of undue influence is the victim's intentionalsubmission arising from the realisation that there is no other practicalchoice open to him where the victim succumbs under pressure. Theremust be pressure,' the practical effect of which is compulsion or theabsence of choice. The evidence-of the defendant does not show anysuch compulsion or pressure on the part of the defendant. Therepeated appeals to the plaintiff to resign from the two companies andto sever all connections with those companies in view of his ill-healthand in the interest of the future development and expansion of thosecompanies were calgulated to persuade the defendant to do thecorrect thing by the companies. At the worst the appeals amountedonly to pressure of a kind which the law regards as legitimate, in acommercial transaction. The backdrop in which the impugnedtransaction took place has been described by the trial Judge asfollows:
"Gunasekera is a man weak in mind due to his illness. Miller is, soto say, guardian angel of the commercial group of companies.Ratwatte is a shareholder and director similar to Gunasekera butwith his mind perhaps in a better state, both keep on insisting thatGunasekera must give i*p his job as director and his shares as ablock at a price more-than he paid for the sake of the future of thecompany which had given him leave and passage n.n'ney to go toEngland. It must be noted that there is no other promise butpayment of more than he paid for the shares, six months leave,salary less the Provident Fund contribution and ex gratia payment ofRs. 92.513.00."
280Sri Lanka Law Reports 2 Sri L.R.
The evidence further discloses that the discussions and decisionsbetween the several parties did not relate to a single transaction,involving the transfer of shares between the plaintiff and defendant; itwas a complex transaction involving not merely plaintiff as vendor anddefendant as purchaser, but other shareholders also as buyers and theseverance of all connection between the plaintiff and the twocompanies; it was for this reason that the Board meetings werenecessary; the scheme involved transfer-of shares not only to theplaintiff but also to the three other shareholders of the twocompanies; the scheme was evolved in the interest of thedevelopment and expansion of those companies and as plaintiff hadbecome a sick person and did not fit into the scheme. Miller wasimpeded to persuade him to drop out, by resigning his directorship andtransferring his shares to the other shareholders of the Companies.Pestering the plaintiff to co-operate with them in implementing thescheme cannot be regarded as illegitimate pressure vitiating theconsent of the plaintiff to play his part. The Court of Appeal has failedto view the impugned transaction in its proper perspective, and haserred in coming to the conclusion that the defendant "by persisting,worrying and pestering" coerced the plaintiff into the bargain. Theplaintiff's consent to the contract did not cease to be voluntarybecause he gave into such worrying and chose to get rid of theworrying by acceding to. defendant's request. There was no coercionof his will such as to vitiate his consent. The evidence discloses thatthe plaintiff has in accordance with the arrangement between him andthe other parties received on account of his parting from thecompanies a sum of Rs. 227,487 from C.M.M. Ltd., (PI 2) and a sumof Rs. 92,513 being exgratia payment plus a sum of Rs. 5,000,representing the price of the 500 shares held by plaintiff in C.C.A. andRs. 26,400 being six months leave salary less Provident Fundcontribution. It may be that the plaintiff might not have been too happyabout the transaction, but it cannot be said that the defendantdominated him and imposed himself on him to bring about thetransaction. It is not plaintiff's case that he apprehended someuntoward consequences to himself if he failed to comply with therequest of the defendant and the others and that was-why he sold theshares at that price offered by the defendant. The importuning on thepart of the defendant and Miller, testified to by the plaintiff does notmeasure up to undue influence in the eye of law or equity and does notimport improper pressure.
CARatwatfev. Goonesekera (Sharvananda. C.J.)281
The Court of Appeal misconceived the nature of undue influencethat would permit a party to avoid a transaction to which he hadapparently consented. The court was not justified on the evidence onrecord, in reversing the finding of the trial Judge with regard to theissue of undue influence. In my view the evidence does not show thatthe plaintiff was constrained to transfer his shares in the twocompanies consequent to the exercise on him of any undue influenceby the defendant or his agents.
The trial Judge found in favour of the plaintiff on the issue of laesioenormis and has ordered the cancellation of the sale of the shares byplaintiff to defendant, if defendant failed to pay the difference betweenthe purchase price and, what according, to him, was the true value.Counsel for the defendent-appellant has submitted that the DistrictJudge has misdirected himself in law in holding that the doctrine oflaesio enormis applies in the case of transfer of shares and hasmisdirected himself on the facts in computing What was the true valueof the said shares.
The Court of Appeal did not address -itself to the question of theapplicability of the doctrine of laesio enormis since it had held with theplaintiff on the issue of undue influence. Since this court is holdingagainst the plaintiff, that his transfer of the shares is not vitiated byundue influence, it has become necessary to determine whether thedoctrine of laesio enormis applies to the sale of shares in a companylimited by shares, incorporated under the provisions of the CompanyLaw.
Wessels in his treatise on. the Law of Contracts, Vol. II, section5081, (2nd Ed.) says-
“There is hardly a proposition with regard to laesio enormis whichhas not been the subject of considerable 'controversy. In manycases we can ascertain what the actual practice was in Holland; inother cases the practice is not clear. When the Dutch jurists discusssome of their commonest points regarding, the remedy of laesioenormis their views must often be taken as the expressions ofindividual opinions rather than as definite statements of law asaccepted in Holland."
Laesio enormis, as one of the grounds on which a contract can berescinded in Roman-Dutch Law is quite unknown to and contrary tothe policy of English Law. That doctrine is applied to have contracts
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such as sale, lease set aside on the ground that the party who asks forrescission has been damaged to the extent of more than half of thevalue of the subject-matter of the contract. The tendency in SouthAfrica is to restrict the operation of rescission on the ground of laesioenormis: McGee v. Mignon (10): Coetze v. Pretorius (11)
Wessels further states:- Sec. 5075 –
“According to, the texts of the Roman Law, laesio enormis couldonly be resorted to when land was sold at less than half its truevalue. The law of Justinian probably did not extend the remedy tomovable property. It has been suggested that the doctrine was.introduced in order to protect poor land owners and their children intimes of stress. The remedy may, perhaps, also have been limited toland, because land has always a more constant value thanmovables."
Sec. 5077 – The Code of Justinian only speaks of the sale of land, butthe commentators extended the remedy to houses and then tomovables of considerable value.
Sec. 5079-There has been much controversy as to the desirability ofcontinuing this remedy. Thomasius denied that there was any naturalequity in 'laesio enormis'. The compilers of the French Code weredivided in their opinions though eventually they passed Article 1674CC. as a compromise. They restricted the operation of laesio enormisto the vendor and to immovable property.
Sec. 5084 – "In order to set aside a sale on the ground of laesioenormis the plaintiff, if a vendor, must prove that the true value of thearticle sold at the time of the sale, and at the place where it was sold,was more than twice the contract price –
Sec. 5097 – '(1) The remedy of laesio enormis only applies to caseswhere the value of the subject matter of the sale is known and certain, at the time of the sale. If therefore the value of the thing sold cannot.be determined at the time of the sale, there cannot be laesio enormis.
If the value of the thing sold was not known at the time of the sale,either because it could not be ascertained or because it was notknown, the remedy will not apply."
Ratwatte v. Goonesekera (Sharvananda. C.J.)
In Tjollo Ateljees Bpk v. Small (12) Schreiner, J.A., said at page 860 -"Laesio enormis is out of place in a modern world, with its highlycomplicated commercial organisation and its ingenious sellingdevices." Hoexter A.J.A., observed at page 882 thatv"the doctrine oflaesio enormis is obviously one that does not accord with our modernideas of 'contract'."
The doctrine should not be applied to ordinary commercialtransactions for if applied it would unduly hamper commerce. Thedoctrine should not be extended to a case to which it is notundisputably applicable; such extension is not suited to the conditionsof today.
It was submitted by Counsel for the defendant that the doctrine oflaesio enormis is applicable .in Ceylon only to transfer of immovablesand not that of movables. He based his submission on the fact that allthe case law in Ceylon relating to the doctrine concerned immovableproperty: Gooneratne v. Don Philip (13), Jayawardene v. Amerasekera(14), Punchirala v. Ahamat (15)-, Sobana, v. Meera Lebbe (16),Fernando v. Fernando (17), Wijesiriwardene v, Gunasekera (18),Bodiga v. Nagoor (19), Ponnupillai v. Kumaravelpillai (20), Appuhamyv. Keerala(21), and there is .no reported decision supporting theapplicability of the doctrine to movables. Even assuming that thedoctrine does apply to contracts of tangible movables the questionarises whether it applies to transfer of shares in limited liabilitycompanies. No reported decision of any of the courts in South Africaor in Ceylon applying the doctrine to such shares was cited to us andthere does not appear to be any such reported decision. A share in alimited liability company is certainly not an immovable. It is a mootquestion whether it was a movable, as understood by theRoman-Dutch Law jurists. The concept of shares in a limited liabilitycompany was unknown to Roman Law or to the Roman-Dutch Law. Itis essentially an English Law concept. Section 63 of our Company'sOrdinance 1939 provides that "shares shall be movable property andshall not be of the nature of immovable property." Our Company'sOrdinance is based on the English Company Law. The Englishprovision corresponding to the aforesaid section 63 is section 182 (1)of the Companies Act of 1929 which provides that shares arepersonal estate and not reality; shares are certainly not tangiblechattels and when our section 63 provides that shares shall bemovable property, K assigns shares to the category of movable
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property for the purposes of the application of the provisions of theCompanies Ordinance only and not for purposes outside the provinceof Company Law.
A share in a company is the expression of a proprietory relationship;the share-holder is the proportionate owner of the company but doesnot own the company's assets which belong to the company as aseparate and independent legal entity. "Shareholders are not, in theeye of the law, part owners of the undertaking" Per Evershed J., inShort v. Treasury Commissioners (22). A share in a company doesnot represent the beneficial ownership of a certain proportion of theCompany's property but represents the benefit of a contract made by- the shareholder with the company. In Barland's Trustee v. Steel Bros.& Co. Ltd. (23). Farwell. J., made clear the legal nature of shares-
"A share is the interest of a shareholder in the company measuredby a sum of money for the purpose of liability in the first place and ofinterest in the second, but also consisting of a series of mutualcovenants entered into by all the shareholders inter se inaccordance with section 16 of the Companies Act 1862.- Thecontract contained in the Articles of Association is one of the originalincidents of the share. A share is not a sum of money settled in theway suggested but is an interest measured by a sum of money andmade up of various rights contained in the contract, including theright to a sum of money of a more or less amount."
Lord Greene in Re. G. M. Holdings Ltd., (24) said-
"A share is a chose in action. A chose in action implies theexistence of some person entitled to the rights, which are rights inaction as distinct from rights in possession."
A chose in action confers no right to possession of a physical thing.
Shares are objects of property which are bought, sold, mortgagedand bequeathed. They are indeed the typical items of property of themodern commercial era.
The distinction between movables and immovables is applicable tomaterial objects only. Yet the law applies it to rights also.- Rights, noless than things, are conceived by the law as either movable orimmovable. It has divided the whole sphere of proprietory rights byreference to this distinction. The Roman law and Roman-Dutch lawregarded a right as having the same quality as its subject matter. All
Ratwatte v Goonesekera (Sharvananda. C.J )
rights over immovable things, whether rights in re propria or rights in realiena have themselves been classed as immovable property. Similarlyall rights over movables are bona mobilia themselves. The followingincorporeals are regarded as movables; actions in personam; actionsin rem for the recovery of movables A mortgage bond is a movable forits principal feature is a personal obligation and the right of security ismerely accessory to it. But shares are incorporeal rights which do notlend themselves to satisfactory classification on the basis of mobilityor immobility adopted by Roman or Roman-Dutch Law. They form adistinct class of their Own. A share is a bundle of several rights andliabilities. The principal rights which a share may carry are-
the right to dividend, if while the Company is a going concern, adividend is duly declared;
the right to vote at the meetings of members; and
the right in the winding up of the company, after payment of thedebts to receive a proportionate part of the capital or otherwiseto participate in the distribution of assets of the company.
The principal duty of a shareholder, as far as the company isconcerned, is to pay what is due on the shares. The moneys payableon the share have to be paid by the shareholder when a call forpayment is made upon him by the company.
The holding of a share in a company limited by shares generallycarries the right to receive a proportion of the profits of the companyand of its assets in the winding up, and all other benefits ofmembership combined with an obligation to contribute to its liabilities,all measured by a certain sum of money which is the nominal value ofthe shares, and all subject to the memorandum and articles of thecompany-Palmer's Company Law, Vol. I (23rd Ed.) at page 385.
It is manifest that a share does not dovetail into the Roman orRoman-Dutch Law categorisation of movables and immovables. Tothe jurists of those sytems the concept of an incorporated companyand the nature of a share with its peculiar attributes was somethinginconceivable. Hence, it will be incongruent to apply their doctrine oflaesio enormis to a share which is neither a movable nor an immovableas conceived by them. It is a matter of controversy whether thedoctrine applies to contracts relating to movables. Even assuming thatit does apply in Ceylon to movables, it does not follow that its
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application can be extended to apply to transfer of shares incompanies, as shares do not fit into the Roman or Roman-Dutch Lawclassification of movables or immovables. The legislature has steppedin to enact by section 63 that a share is to be regarded as a movablebut it does not follow that thereby the legislature intended to import allthe incidents of Roman or Roman-Dutch Law relating to movables andmake applicable the doctrine of laesio enormis to commercialtransactions relating to shares, as if they are movables according tothe concepts of Roman-Dutch Law jurists. Further the estimation ofthe value of a share must be a matter of opinion and does not admit ofprecise scientific or mathematical calculation and hence therequirements of the remedy of laesio enormis that the value of thesubject matter of the sale must be known and certain at the time of thesale, cannot be satisfied in the case of the sale of shares. Theseconsiderations militate against the application.of the remedy of laesioenormis to dealings in shares of incorporated companies. Hence theDistrict Judge misdirected himself in applying the doctrine of laesioenormis and avoiding the sale of the said shares by Plaintiff toDefendant. The doctrine does' not apply to the sale of shares inincorporated companies. Commercial realities militate against theadoption of such a doctrine. In my view the doctrine instead offacilitating will be obstructing commercial development. In view of myconclusion that the remedy of laesio enormis is not available to cancelthe sale of shares in incorporated companies, it is not necessary toexamine the correctness of the Judge's determination of the truevalue of the said shares even, though counsel for the defendantattacked the finding.
I allow the appeal, set aside the judgments of the Court of Appealand of the District Court and dismiss plaintiff's action. In the specialcircumstances of the case parties will bear their own costs in all thecourts.
L, H. DE ALWIS, J.-l agree.SENEVIRATNE, J. – / agree.
Plaintiff's action dismissed.