Saurmma and Mohamadu Lebbe.
1943Present: Howard C.J. and Keuneman J.
SAURMMA et al., Appellants, and MOHAMADU LEBBE, Respondent.
92—D. C. Kurunegala, 365'.
Trust—Property transferred to defraud creditors—Illegal purpose—Debtseventually paid—Action to recover property.
Where a person transferred property in the name of another in orderto put it beyond the reach of creditors at a time when those creditorshad instituted proceedings against him,—
Held, that the effect of his action was to delay the payment of hisdebts and that his illegal purpose was carried out, even if the debts wereeventually paid in full.
In such a case the maxim in pari delicto potior est conditio possidentisapplies.
PPEAL from a judgment of the District Judge of Kurunegala. Thefacts appear from the judgment.
H. V. Perera, K.C. (with him E. B. Wikremanayake), for the plaintiffs,appellants.
1 5 N. L. R. 326.
398HOWARD C.J.—Saurmma and Mohamadu Lebbe.
N. E. Weerasooria, K.C. (with him Dodwell Gunawardana and S. R.Wijayatilake), for the defendant, respondent.
Cur. adv. vult.
August 27, 1943. Howard C.J.—
This is an appeal by the plaintiffs against the judgment of the DistrictJudge- of Kurunegala dismissing their action for a declaration of titleto the lands mentioned in the schedule to the plaint. The defendant-respondent had transferred these lands to his son-in-law, the 4th plaintiff,by deed No. 3,473 dated June 4, 1931 (D 1), in order to defraud hiscreditors. The first, second, and third plaintiffs are the minor childrenof the fourth plaintiff who by deed of transfer No. 1,331 of December 18,1937 (P 10), transferred to them sixteen of the twenty-one propertiesin dispute. The defendant, in giving evidence, stated that the years 1930,1931, and 1932, being years of economic depression and the .valueof lands having depreciated, he feared his creditors would seize all hislands for the recovery of the debts due by him and sell them in a depressedmarket. With a view to saving some of his properties and of obtainingtime to pay his debts he therefore executed D 1 for no consideration infavour of the fourth plaintiff on the latter, so he asserts, agreeing tohold the properties dealt with on the deed in trust for him. Defendantstates that he has now paid all his debts and did not defraud any of hiscreditors. The learned Judge was not satisfied that the defendant haddefrauded any of his creditors and, therefore, there was-only an intentionto defraud without any actual fraud, having been committed. He alsoheld that no consideration passed in respect of D 1 and that the defendanthas all along been in possession in spite of the transfer which was executed.In these circumstances, he. held that the cestuique trust is not precludedfrom enforcing the. trust and on the authority of Mohamadu Marikar v.Ibrahim Naina' and Andris v. Punchihamy! gave judgment for thedefendant.
In contending that the decision of the learned District Judge waswrong in law, Mr. Perera, on behalf of the plaintiffs, has argued that,as the legal title is in the plaintiffs by virtue of D 1, the defendant canonly succeed by setting up his own illegality and fraud. In fact, hemaintains that the defendant, when he executed D 1, committed criminaloffences by contravening the provisions- of sections 404 and 406 of the. Penal Code' Mr. Perera has invited our attention to various English cases.In this connection I would refer to section 2 of the Trusts Ordinance(Cap. 72) which is worded as follows : —
“2. All matters with reference to dny trust, or with reference to anyobligation in the nature of a trust arising or resulting by theimplication or construction of law, for which no specific provision ismade in this or any other Ordinance, shall be determined by theprinciples of equity for the time being in force in the High Court ofjustice in England.”
Moreover in the judgment of Middleton J. on page 191 of MohamaduMarikar v. Ibrahim Naina (supra) the following passage occurs : —
“ Under the Roman-Dutch law he would not be entitled to anyrelief, and I have some doubt if this isva case to which should be1 13 N.L. B. 187. .-*24 N L.R. 203.
HOWARD C.J.—Saurmma and Mohamadu Lebbe.
applied the doctrine of equity derived from the English law to soften theRigour of the Roman-Dutch law.”
In Taylor v. Chester1 the plaintiff deposited with the defendant the halfof a £50 bank note by way of pledge to secure the payment of moneydue from the plaintiff to the defendant. The debt was contracted forwine and suppers supplied to the plaintiff by the defendant in a brothelkept by her, to be there consumed in a debauch. The plaintiff havingbrought an action to recover the half-note, it- was held that the maxim,in pari delicto potior est conditio possidentis, applied ; and that as theplaintiff could not recover without showing the true character of thedeposit, and that being on an illegal consideration to which he was himselfa party, he was precluded from obtaining the assistance of the law torecover it. The following passage from the judgment of Mellor J. isapplicable to the facts of the present case : —
“ It was argued on the part of the defendant, in showing cause againstthe rule, and in support of the demurrer to the special repli-cation of the plaintiff, that, upon the finding of the Jury and thefacts as admitted by the demurrer, the plaintiff and defendant werein pari delicto and that therefore upon the whole record judgmentmust be entered for the defendant. On the part of the plaintiff it was. argued that it was the defendant who was relying on the illegal trans-action as an answer to a claim of the plaintiff, founded on his owner-ship of the note, and his rights to recover back the same, and manystartling consequences were pointed out to us as likely to result froma decision that the plaintiff could not recover. We have fully con-sidered the case, and are satisfied that the plaintiff cannot recoverunder the circumstances found by the jury, and admitted on therecord. The maxim that ‘ in pari delicto potior est conditio possi-dentis ’ is as thoroughly settled as any proposition of law can be.It is a maxim of law, established, not for the benefit of plaintiffs ordefendants, but is founded on the principles of public policy, whichwill not assist a plaintiff who has paid over money or handed overproperty in pursuance of an illegal or immoral contract, to recover itback, ‘ for the Courts will not assist an illegal transaction in anyrespect’ per Lord Elienborough.in Edgar v. Fowler '-'; Collins v. Blan-tem’; Lord Mansfield in Holman v. Johnson'.
The true test for determining whether or not the plaintiff and thedefendant were in pari delicto, is by considering whether the plaintiffcould make out his case otherwise than through the medium and bythe aid of the illegal transaction to which he was himself a party :Simpson v. Blosss, Fivaz v. Nicholls". It is to be observed that in thiscase the illegality is not in a collateral matter, as in the case of Ferret v.Hill1, which was cited for the plaintiff ; but is the direct result of thetransaction upon which the deposit of the half-note took place.”
In Gascoigne v. Gascoigne the same principle was followed and it washeld that a husband, who transferred property to his wife’s name with her
1 1868—69 ; 4 Q. B. 309.a 1 Taunt. 246.
3 East, 222.‘ 2 C. B. 501,
« 2 Wils. 341’ 15 C. B. 207 ; 23 L. J. (C. P.) 185.
Cou>p. at p. 343.8 1918 1 K. B. 223.
HOWARD C.J.—Saurmma and Mohamadu Lebbe.
knowledge and connivance to defraud his creditors, could not be allowedto set up his own fraudulent design as rebutting the presumption that theconveyance was intended as a gift to her, and she was entitled to retainthe property for her own use notwithstanding that she was a partyto the fraud. The judgment of the Court contains the following passagesat pages 226 and 227 Which are of interest so far as this case is con-cerned : —
“ Now, assuming that there was evidence to support the finding thatthe defendant was a party to the scheme which the plaintiff admitted,but without deciding it, what the learned judge has done is this : Hehas permitted the plaintiff to rebut the presumption which the lawraises by setting up his own illegality and fraud, and to obtain reliefip equity because he has succeeded in proving it. The plaintiff cannotdo this.
A similar question arose before Lord Eldon in Muckleston v. BrownLord Eldon commented on the decision in Cottington v. Fletcher', andsaid that if the defendant there had demurred the relief would havebeen refused, because the plaintiff stated that he had been guilty of afraud upon the law, to evade and disappoint the provision of the.Legislature, ‘and coming to equity to be relieved against his own act,and the defence being dishonest, between the two species of dishonestythe Court would not act, but would say : Let the estate lie where itfalls’”.
On the other hand Counsel for the defendant-respondent has invited ourattention to Byrnes v. Hughes’, where it was held that although, wherea trust has been,,created for an illegal purpose, the Court will not ingeneral interfere, ft will do so where the illegal purpose fails to take effect.The judgment of Lord Romilly M.R., at page 479, contains the followingpassage : —
“ Two objections have been raised on behalf of the defendant. Thefirst is, that the assignment was made for an illegal purpose, and itis said that such being the case the Court will not interfere. T thinkthe correct answer to this was given by Mr. Southgate, namely, thatwhere the purpose for which the assignment was given is not carriedinto execution, and nothing is done under it, the mere intention toeffect an illegal object when the assignment was executed does notdeprive the assigner of his, right to • recover, the property from theassignee who has given no consideration for it. It is clear in the presentcase that no harm has been done to any creditor, and, in iact, the suitis now being prosecuted for the purpose of enabling the creditors torecover something.” •
It seems to me that the grounds underlying the decision in this casewere (I) That there was mere intention to effect an illegal object; (2)That the illegal object Was not carried into effect; (3) That nothing wasdone under it; (4) That the plaintiff was not setting up his intended fraudto obtain a benefit for himself but for the parties he intended to defraud,namely, his creditors. There is no doubt that the two local decisionsrelied on by Counsel for the defendant and cited by the learned District
1 (3801) 6 Ves. 5268.* 2 Atlc. 156.3 (1869-70) 9 Eg. 475.
Blue, Green, Red Lines and The Commsnr. of Transport
Judge support the contention that where there was only an intention todefraud, but no actual fraud was committed, the cestuique trust canrecover. But inasmuch as the matter is governed by English law asmodified by the Trusts Ordinance, it is difficult to understand how theRoman-Dutch maxim “ a man may not enrich himself at the expense ofanother ”, called in aid of these decisions, can have any relevance. Healso relies on section 86 of the Trusts Ordinance (Cap. 72). This provisionis worded as follows : —
“ Where the owner of property transfers it to another for an illegalpurpose, and such purpose is not carried out into execution, or thetransferor is not as guilty as the transferee, or the effect of permittingthe transferee to retain the property might be to defeat the provisionsof any law, the transferee must hold.the property for the benefit of thetransferor.”
1 find it a matter of some difficulty to reconcile the decisions, in Taylor v.Chester (supra) and Gascoigne v. Gascoigne (supra) with the two localdecisions relied on by the defendant. No doubt in the former case it wasproved that the illegal purpose was carried out, but in the latter casethere is nothing in the report to indicate that this was so. It is, thereifore,of the utmost relevance to consider what, in this case, was the purpose ofthe assignment to the fourth plaintiff and was that purpose an illegal one.The defendant in his evidence states that, when he made the assignment,he owed the Chettinad Corporation Rs. 1,000 on a promissory note andon which he was subsequently sued. He was also sued by SevuganChettiar and Natesan Chettiar on a bond for Rs. 3,500 made in 1927.The defendant states that he told the fourth plaintiff that he was trans-ferring the properties in his name to prevent the creditors selling theseproperties for low prices. Or in other words he was putting the propertiesbeyond the reach of creditors at a time when one of these creditors hadinstituted proceedings against him in the Courts. Even if the defendanthad no intention of depriving his creditors permanently of what wasowing to them and has eventually paid the debts in full, the effect of whathe did was to delay the payment of those debts and his purpose wasillegal. That illegal object was achieved. Hence the maxim in paridelicto potior est conditio possidentis, applies inasmuch as the defendantcannot succeed without proving his own fraud and illegality to rebutthe title conferred on the plaintiffs by D 1. The judgment of ..the DistrictCourt must be set aside and judgment entered for the plaintiffs as prayedfor with costs in this Court and the Court below.
Keuneman J.—I agree.Appeal allowed.