SOCKALINGAM CHETTIAR v. RAMANAYAKE et al

042-NLR-NLR-V-38-SOCKALINGAM-CHETTIAR-v.-RAMANAYAKE-et-al.pdf


Delivered by SIB L. SANDERSON.—Sockalingam Chettiar v. Ramanayake. 229
[n the Privy Council.]
1S36Present: Lord Maugham, Lord Salvesen, and
Sir Lancelot Sanderson.
SOCKALINGAM CHETTIAR v. RAMANAYAKE et al.
Mortgage bond—Security for loan—fictitious promissory notes given—Actionon bond—Loan recoverable—Notes inadmissible in evidence—MoneyLending Ordinance, No. 2 of 1918. ss. 2, 10. and 14.
Where a mortgage bond was entered into to secure a loan in respect ofwhich promissory notes, which were “ fictitious ” within the meaning ofsection 14 of the Money Lending Ordinance, were given,—
Held, that an action may be maintained on the bond to recover theloan, notwithstanding the provisions of section 10 of the Money LendingOrdinance.
Held, further, that the Court has power under section 2 of the MoneyLending Ordinance to reopen the transaction and to take an accountbetween the parties.
The fictitious promissory notes are not admissible in evidence to provethe loan.
^ PPEAL from a judgment of the Supreme Court
R. M. Montgomery K.C. {with him Hallett, K.C., and L. M. de Silva, K.C.),for appellants.
Chinnadurai and Lady Chatterjee, for the respondents.
November 19, 1936. Delivered by Sir Lancelot Sanderson.
This is an appeal by the plaintiffs against two decrees of the SupremeCourt of the Island of Ceylon dated August 1, 1933, whereby the SupremeCourt set aside an order and a decree of the District Court of Colombodated December 9 and 21, 1932, respectively and dismissed the actionwith costs. The respondents are the first and second defendants in theaction.
The material facts are as follows : —
By a mortgage bond dated July 28,1928, the first defendant
(Ramanayake) covenanted with the first plaintiff (Sockalingam) and oneRamasamy to pay any sum of money which might thereafter be orbecome owing and payable to the first plaintiff or the said Ramasamy oreither of them upon or in respect of any promissory notes or chequesmade or endorsed by the first defendant or upon chits, tundus, or otherwritings or in respect of any loans or advances or in respect of anyaccounts or transactions whatsoever with interest at the rate of 12 percentum per annum. The bond further secured all such sums by themortgage of certain properties therein specified.
On April 1, 1931, the said Ramasamy assigned all his rights under thesaid mortgage bond to the second plaintiff, and the action in which thisappeal arises was brought on the same day.
The plaintiffs thereby sought to recover the sum of Rs. 129,415.87alleged to be due in respect of money lent on the security of the said bondand upon certain promissory notes : they prayed further for the usualmortgage decree for sale of the mortgaged property in default of paymentof the said sum.
I 35 N. L. R. 33.
230 Delivered by SIR L. SANDERSON.—Sockaltngam Chettiar v. Ramanayake.
The second defendant was made a party to the action as a puisneencumbrancer of the mortgaged property.
Certain pleas were made and issues raised to which it is not nownecessary to refer, and the questions which arise in this appeal relateto the issues numbered 8 and 9 in the judgment of the District Judge.They are as follows :—
“ (8) Are the promissory notes mentioned in paragraph (6) of the plaintor any notes of which they are renewals not enforceable by reason of thefailure to give details required by section 10 of Ordinance No. 2 of 1918 ?
“ (9) In view of the several allegations in the plaint is the second defendantentitled to ask that the transactions between the first defendant and theplaintiffs or either of them be reopened and an account taken ? ”
The District Judge decided that the promissory notes in question werethemselves not enforceable but at the same time he held that they wereadmissible in evidence to prove the amount due on the mortgage bond.
On the 9th issue he held that the second defendant was entitled to askthat the transactions between the plaintiffs and the first defendantshould be reopened.
Accordingly on December 9, 1932, he directed the plaintiffs to file inCourt a statement showing the moneys actually lent by the first plaintiffand Ramasamy to the first defendant from time to time on promissorynotes, the amount of interest actually deducted in advance, the interestwhich they were entitled to deduct if calculated at 12 per cent, for theperiod when each note fell due and the amounts paid by the first defendantwith the date of each payment.
Accounts were filed by the plaintiffs in accordance with the said orderand on December 21, 1932, the District Judge, after investigating theaccounts and hearing evidence, held that a sum of Rs. 10,518.13 hadbeen overcharged by the first plaintiff and that a sum of Rs. 7,378.96had been overcharged by the second plaintiff. He therefore made adecree that the first defendant should pay to the plaintiffs jointly thesuni of Rs. 111,518.78 with interest thereon at 12 per centum per annumfrom April 1, 1931, to date .of decree and thereafter on the aggregateamount of the decree at 9 per centum per annum till payment in fulland costs of suit forthwith. He further made the usual mortgage decreein respect of the said sums.
The first and second defendants appealed to the Supreme Court bytwo petitions. The first was against the order of the District Judgeof December 9, 1932, and the second against the decree of the said Judgedated December 21, 1932. The Supreme Court held that as the plaintiffswere money lenders the provisions of the Ordinance relating to moneylending—viz., No. 2 of 1918—applied to the transactions, that thepromissory notes failed to comply with the provisions of section 10 of theOrdinance because some of them did not show the amount of moneydeducted as interest paid in advance and because others which wererenewal notes failed to show the capital sum actually borrowed ; andthat under sub-section (2) of the said section the promissory notes werenot enforceable.
The Court held that though the bond was not in itself illegal, thepromissory notes were illegal, and that the Court would refuse to enforce
Delivered by SIR L. SANDERSON.—Sockalingam Chettiar v. Ramanayake. 231
the security for those illegal transactions, the bond so far as it securedthe illegal transactions being tainted with the same illegality.
Accordingly on August 1, 1933, by the two decrees of that date theSupreme Court allowed both appeals, set aside the order and decree ofthe District Judge, dismissed the plaintiff’s action and directed that theplaintiffs should pay the taxed costs of the first and second defendants.
It is against the above-mentioned decrees that the plaintiffs haveappealed to His Majesty in Council.
The material sections of the Ordinance are as follows: —
“2 (1) Where proceedings are taken in any court for the recovery ofany money lent after the commencement of this Ordinance, or the enforce-ment of any agreement or security made or taken after the commencementof this Ordinance in respect of money lent either before or after the commence-ment of this Ordinance, and there is evidence which satisfies the court—
That the return to be received by the creditor over and above whatwas actually lent (whether the same is charged or sought to berecovered, specifically by way of interest, or in respect of expenses,inquiries, fines, bonuses, premia, renewals, charges, or otherwise),having regard to any sums already paid on account, is excessive,and that the transaction was harsh and unconscionable, or, asbetween the parties thereto, substantially unfair; or
<b) That the transaction was induced by undue influence, or is otherwisesuch that according to any recognized principle of law or equity thecourt would give relief; or
(c) that the lender took as security for the loan a promissory note orother obligation in which the amount stated as due was to theknowledge of the lender fictitious, or the amount due was leftblank—
the court may reopen the transaction and take an account between thelender and the person sued, and may, notwithstanding any statement orsettlement of account or any agreement purporting to close previous dealingsand create a new obligation, reopen any account already' taken betweenthem, and relieve the person sued from payment of any sum in excess of thesum adjudged by the court to be fairly due in respect of such principal,interest, and charges as the court, having regard to the risk and all thecircumstances, may adjudge to be reasonable; and if any such excess hasbeen paid or allowed in account by the debtor, may order the creditor torefund it; and may set aside, either wholly or in part, or revise, or alterany security given or agreement made in respect of money lent, and if thelender has parted with the security may order him to indemnify the borroweror other person sued.
Any court in which proceedings might be taken for the recovery ofmoney lent shall have and may, at the instance of the borrower or surety orother person liable, exercise the like powers as may be exercised under the lastpreceding sub-section, and the court shall have power, notwithstanding anyprovision or agreement to the contrary, to entertain any application underthis Ordinance ■ by the borrower or surety or other person liable, notwith-standing that the time for repayment of the loan or any instalment thereofmay not have arrived.
In any insolvency proceedings on any application relating to theadmission or amount of a proof in respect of any money lent, the court mayexercise the like powers as may be exercised under this section when proceed-ings are taken for the recovery of money.
The foregoing provisions of this section shall apply to any transactionwhich, whatever its form may be, is substantially one of money lending.
Nothing in this section shall be construed as derogating from' theexisting powers or jurisdiction of any court.
232 Delivered by SIR L. SANDERSON.—Sockalingam Chettiar v. Ramanayake.
8(1) A person who carries on the business of money lending, or whoadvertises or announces himself or holds himself out in any way as carryingon that business, shall keep or cause to be kept a regular account of each loan,clearly stating in plain words and numerals the items and transactionsincidental to the account, and entered in a book paged and bound in such amanner as not to facilitate the elimination of pages or the interpolation orsubstitution of new pages.
If any person, subject to the obligations of this section, fails to complywith any of the requirements thereof, he shall not be entitled to enforceany claim in respect of any transaction in relation to which the default shallhave been made.
Provided that in any case in which the court is satisfied—
That the default was due to inadvertence and not to any intention to
evade the provisions of this section ; and
That the receipt of the loan, the amount thereof, the amount of the
payments on account, and the other material transactions relating
thereto satisfactorily appear by other evidence—
the court may give relief against any such default on such terms as it maydeem just.
10 (1) In every promissory note given as security for the loan of moneyafter the commencement of this Ordinance, there shall be separately anddistinctly set forth upon the document—
The capital sum actually borrowed ;
The amount of any sum deducted or paid at or about the time of the
loan as interest, premium, or charges paid in advance ; and
The rate of interest per centum per annum payable in respecrt of
such loan.
Any promissory note not complying with the provisions of this sectionshall not be enforceable.
Provided that in any case in which the court shall be satisfied that thedefault was due to inadvertence . and not to any intention to evade theprovisions of this section, it may give relief against the effect of this sub-section on such terms as it may deem just.
The setting forth of the particulars required by sub-section (1) shallnot affect the negotiability of any promissory note.
Any promissory note setting forth the said particulars substantiallyin the form given in the schedule to this Ordinance shall be deemed to be incompliance with this section.
The provisions of this section shall apply to renewals of any loan,and in all such cases the amount stated as the capital sum actually borrowedshall be the amount of the original loan.
Any person who shall take as security for any loan a promissory noteor other obligation in which the amount stated as due is to the knowledge ofthe lender fictitious, or in which the amount due is left blank, shall be guiltyof an offence, and shall be liable on conviction to a fine not exceeding fivehundred rupees, or in the event of a second or subsequent offence, either to afine not exceeding one thousand rupees, or to simple imprisonment for aperiod not exceednig six months.
A promissory note given in respect of a loan with regard to which adeduction was made or a sum paid at or about the time of the loan in respectof interest, premium, or charges payable in advance, without such deductionor payment being set forth upon the documents in accordance with section 10(unless the circumstances are such as reasonably to entitle the lender to reliefunder that section), and any promissory note or other obligation in respect ofa loan, with regard to which at or about the time of the loan any payment was
Delivered by SIR L. SANDERSON.—Sockalingam Chettiar v. Ramanayake. 233
made,' or any collateral transaction entered into with a view to disguisingthe actual amount of the sum advanced, or the rate of interest payable inrespect thereof, shall be deemed to be a promissory note or obligation inwhich the amount stated as due is, to the knowledge of the lender, fictitiouswithin the meaning of sections 2 and 13 of this Ordinance.”
Schedule.
Promissory Note given in respect of a Loan.
Stamp.
On demand (or months after date) I promise to
pay to , or order, the . sum of Rupees ,
with interest thereon at the rate of per centum
per annum.
(Signature of Borrower.)
At the hearing of the appeal before their Lordships it was admitted trlearned Counsel for the plaintiffs that the promissory notes did not complywith the provisions of section 10 inas much as they did not state theinterest, premium, or charges deducted or paid in advance and conse-quently that the promissory notes were not enforceable. Further,it was admitted that the default was not due to inadvertence and thatthe promissory notes must be taken to be fictitious within the meaningof the Ordinance to the knowledge of the lenders. It was howevercontended that the District Judge had jurisdiction to reopen thetransactions under section 2 of the Ordinance and to take an accountbetween the lenders, viz., the plaintiffs and the person sued, viz., thefirst defendant and relieve the first defendant from payment of any sumin excess of the sum adjudged by the District Judge to be fairly due inrespect of principal, interest, and charges as the District Judge mightadjudge to be reasonable.
On the other hand it was contended on behalf of the defendants thatinasmuch as the promissory notes were taken as security for the loansand were not only unenforceable by reason of section 10 of the Ordinancebut were, by necessary implication from section 13, prohibited, theplaintiffs were not entitled to recover the loans, or any part thereof.
In considering the above-mentioned contentions the first thing to beobserved is that in the Ordinance the loan is treated as being somethingdifferent from the promissory note, which is therein described as asecurity.
The provisions of section 10 make that clear. The section beginswith the sentence, “ In every promissory note given as security for theloan of money ”.
This must be remembered in construing the material words of section10, sub-section (2), viz.: “any promissory note not complying with theprovisions of this section shall not be enforceable, ” that is to say, thesecurity, consisting of the promissory note, for the loan is not to beenforceable. The sub-section does not provide that the loan shall beirrecoverable. If that had been intended it could easily have been soprovided.
Particulars re-quired by “ TheMoney LendingOrdinance, No. 2of 1918.”
1. Capital sumborrowed, Rs. —.
interest, pre-mium, or char-ges deducted orpaid in advance,if any, Rs.—.
Rate of in-terest per cen-tum per annum
234 Delivered by SIR L. SANDERSON.—Sockalingam Chettiar v. Rarnknayd}fe.
It is to be noted that the above-mentioned provision is very diffefent''from the words of section 8, sub-section (2), which provides that
“ If any person subject to the obligations of this section fails to complywith any of the requirements thereof he shall not be entitled to enforce anyclaim in respect of such transaction in relation to which the default shallhave been made. ”
The difference between the provisions of the two above-mentionedsections is striking and it is abundantly clear that when it was intendedto prevent any claim in respect of a transaction being enforced, it wasstated in clear and unmistakable language.
In their Lordships’ opinion section 2 affords evidence that theprovisions of section 10 were not intended to make the loan thereinreferred to irrecoverable ; for that section provides that where proceed-ings are taken in any Court for the recovery of any money lent or theenforcement of any security made or taken after the commencementof the Ordinance in respect of any money lent, the Court may reopenthe transaction in certain events. One of the events is if the Court issatisfied that the lender took as security for the loan a promissory notein which the amount stated as due was to the knowledge of the lenderfictitious or the amount due left blank.
To ascertain what is meant by the phrase in this section “ a promissorynote in which the amount stated as due was to the knowledge of thelender fictitious ” reference must be made to section 14 which providesthat a promissory note given in respect of a loan with regard to whicha deduction was made or a sum paid at the time of the loan in respect ofinterest, premium, or charges payable in advance without such deductionor payment being set forth upon the document in accordance withsection (subject to the proviso therein stated) is to be deemed to be apromissory note in which the amount stated as due is to the knowledgeof the lender fictitious within the meaning of sections 2 and 13 of theOrdinance.
It follows therefore that talthough the promissory notes in this casewere notes in which the founts stated as due were to the knowledge ofthe lender fictitious within the meaning of section 14 and could iiot beenforced by reason of the provisions of section 10, the Court hadjurisdiction under section 2 of the Ordinance to reopen the transactionand to take an account between the plaintiffs and the first defendant.
It was argued on behalf of the defendants that section 2 applies onlyto cases where action is taken by the borrower or by a third personto whom the security in question has passed by way of assignmentand that otherwise section 2 would be inconsistent with the provisionsof section 10.
Their Lordships are unable to accept that contention.
The provisions of the section are clear and unqualified and there is nojustification for putting a construction upon the section which confinesthe jurisdiction of the Court to the cases suggested in the argument.
Further it appears to their Lordships that there is no inconsistencybetween section 2 and section 10.
Section 10 provides that if the Court is satisfied that the default wasdue to inadvertence and not to any intention to evade the provisions ofthe section the Court may give relief on such terms as it may deem just.
Delivered by SIR L. SANDERSON.—Sockalingam Chettiar v. Ramanaydke. 235
'fhat provision is directed to a state of things quite different from thatcontemplated in section 2, which provides for a case where the lenderhas taken as security for the loan a promissory note in which the amountstated as due was to the knowledge of the lender fictitious.
In such a case jurisdiction is given to the Court to reopen the transac-tion and to take an acccount of what is actually due to the lender.
Stress was laid by learned Counsel for the defendants upon theprovisions of section 13, and it was argued that inasmuch as the Ordi-nance provided a penalty for taking a “ fictitious ” promissory note assecurity for a loan, it must have been intended that the loan could not berecovered.
There is no doubt that this section and other sections of the Ordinancewere intended for the protection of members of the public who might beborrowers from money lenders, and it is quite intelligible that it wasconsidered of great importance that a promissory note taken by a moneylender as security for a loan should bear on the face of it the particularsspecified in section 10, and that with a view to enforce such protectiona penalty was imposed on the money lender in the event of his non-compliance with the provisions thereof.
It does not necessarily follow that it was intended that the loan inrespect of which such “ fictitious ” promissory notes were taken shouldbe irrecoverable, and when the other sections of the Ordinance are takeninto consideration and in the absence of any specific provision such as isfound in section 8, sub-section (2), to the effect that the money lendershould not be entitled to enforce his claim their Lordships are of opinionthat the provisions of section 13 do not prevent the Court from reopeningthe transaction and taking the account under the provisions of section 2.
Their Lordships cannot refrain from saying that in their opinion thetrue construction of the provisions of the Ordinance is by no means freefrom difficulty, and they appreciate the point of view adopted by thelearned Judges of the Supreme Court, and the reasons stated in supportthereof, but after due consideration they have come to the conclusionthat the District Judge was right in holding that he had jurisdictionto reopen the transaction and to take the account between the plaintiffsand the first defendant. That being so it was in his discretion to decidewhether he should reopen the transaction and take the account, andtheir Lordships are not prepared to hold that he exercised that discretionwrongly.
Their Lordships, however, are of opinion that the promissory noteswhich were not enforceable by reason of section 10 and by implicationfrom section 13 prohibited, should not have been admitted in evidenceto prove the loans. It is to be observed that the admission in evidenceof the notes would make the sections practically valueless. TheirLordships’ attention was drawn to certain English decisions, to whichin their opinion it is not necessary to refer, inasmuch as their Lordships'decision is based upon the true construction of the provisions of theOrdinance.
The learned Counsel for the defendants desired to rely on the provisionsof section 8 of the Ordinance alleging that the books of the plaintiffswere not kept in accordance with the terms of that section. It appears
19/38:
236 Delivered by SIR L. SANDERSON.—Sockalingam Chettiar v. Ramanayake.
however, that the defendants wished to raise an issue upon this pointat the trial, and upon objection by the plaintiffs the District Judgerefused to allow that matter to be relied upon by the defendants as it hadnot been referred to in the pleadings, and he declined to state any issuein respect thereof.
Their Lordships are of opinion that the District Judge’s decision wastght in this respect since the proposed issue might well have involvedthe calling of evidence and they refused to allow learned Counsel for thedefendants to argue the point.
It must be clearly understood that on the further taking of accounts,to which reference will presently be made, the above-mentioned defencewill not be open to the defendants.
The District Judge apparently allowed a rate of interest higher than12 per cent, per annum in respect of certain loans for short periods.In their Lordships’ opinion this was not permissible, and that matteralone would necessitate a further taking of the account.
The more important matter, however, is the admission by the DistrictJudge of the promissory notes, which were not enforceable, as evidenceto prove the loans, which as already stated was not permissible.
In their Lordships’ opinion the proper course is to remit the. caseto the Supreme Court in order that the Supreme Court may give suchdirections as are. necessary for taking a further account between theparties to ascertain what amount is due by the first defendant to theplaintiffs in respect of money lent and interest at the rate of 12 per cent,per annum, on the footing that the promissory notes given by thedefendants are neither enforceable, nor admissible in evidence to provethe loans.
The plaintiffs will be entitled to the usual mortgage decree for suchamount, if any, as may be found due to them on the taking of the furtheraccount.
It will be in the discretion of the Supreme Court to make such ordersas are necessary for carrying out this direction, but their Lordshipsare of opinion that the further account should not be taken by theDistrict Judge who took the account in the first instance. It is, ofcourse, not intended to make any reflection upon the learned Judge,but he, having seen the promissory notes and admitted them in evidence,might be placed in a difficult position if he were asked to take the accountagain.
The result is that the appeal must be allowed and the two decreesof the Supreme Court and the order and decree of the District Judgemust be set aside, and the matter remitted to the Supreme Court withthe above-mentioned direction.
The defendants must pay to the plaintiffs their costs of the appealsto the Supreme Court and two-thirds of their costs of the appeal to HisMajesty in Council.
There will be no order as to the costs of the suit except that theplaintiffs must pay to the defendants the costs incurred by them inrespect of the taking of the account directed by the District Judgeand in respect of the further hearing before the District Judge onDecember 21, 1932.
AKBAR S.P.J.—Sinnetamby v. Shanmugam.
237
The procedure to be adopted for the taking of the account herebydirected and the costs thereof will be a matter for the direction of theSupreme Court.
Their Lordships will humbly advise His Majesty accordingly.
Appeal allowed.